Government spending and public services
Here’s an item from the Guardian:
Drawing on IMF figures published last week, the graph compares what will happen to government spending in Britain up to 2017 with the outlook for Germany and the US. And what it shows is that the UK will plunge from public spending on a par with Germany in 2009, to spending less than the US by 2017. Had France, Sweden or Canada been included on this graph, the UK would still come bottom. If George Osborne gets his way, within the next five years, Britain will have a smaller public sector than any other major developed nation.
Fan or critic, nearly everyone now agrees that this government wants to shrink the state, but very few take on board what that means. This graph shows just how radical those ministerial plans are. Particularly striking is the fact that Britain will end up spending less as a proportion of its national income than even the US, the international byword for a decrepit public sector.
Here is the IMF data.
Country G/GDP (2013, IMF)
Australia 35.33%
Canada 41.66%
New Zealand 32.76%
Switzerland 33.44%
UK 44.43%
US 40.47%
Asia:
Hong Kong 18.69%
Japan 40.56%
Singapore 17.88%
South Korea 20.80%
Taiwan 21.05%
Why stop at 40%. Why not shoot for 33% to 35%, and end up with the even more “decrepit” public services of Australia and Switzerland?
Seriously, the idea that “decrepit” public services are a simple function of government spending as a share of GDP is beyond absurd. Obviously it may play some role, but there is much more involved. Here is some data for Britain and Singapore, the country with the lowest government spending:
Country Life expectancy PISA scores Infrastructure quality
Britain 80.42 years 1507 5.3
US 79.56 years 1476 5.8
Singapore 84.38 years 1666 6.6
So the Britain comes in about the same as the US and far below Singapore, which spends 17.88% of GDP. Do I think these are good ways of comparing public services? Of course not, I’m not stupid. Rather I provide them because they are the sorts of metrics that others use. Did I cherry pick? In life expectancy the top 4 countries (excluding tiny places with less than 1 million) are Japan, Singapore, Hong Kong and Switzerland, all of which spend less than Britain. Singapore is 3rd in the world in infrastructure, trailing small government Hong Kong and Switzerland. Hong Kong is number 2 in Pisa scores, and Switzerland also scores well above the UK. Asian countries might do well in life expectancy due to racial/diet factors (Asians live longer than whites even in America.) But what about Denmark, where life expectancy is only 79.09. Are we to assume they have even more “decrepit public services” than the US?
Of course this is comparing apples and oranges to some extent; many of the successful countries are small. But the UK is much smaller than the US. Closer in population to Canada or Australia. Yet both of those countries get by with much lower government spending than the UK, without “decrepit public services.” The US is a sort of bogeyman used by non-Americans on the left to scare voters into supporting bloated government sectors.
Some criticize conservatives for pointing to Singapore, a (supposedly) dictatorial regime. (It’s not really, but let’s accept that for the sake of argument.) The Asian data suggests the small government sector there has little to do with a lack of democracy—both Taiwan and Korea also have small government. And of course there is no country in the world that is more democratic than Switzerland, which spends far less than even the US. So I don’t buy the “voters prefer big government” argument made by liberals who don’t understand that poll results do NOT measure “public opinion,” because there is no such thing as public opinion. I can get anywhere from 20% to 60% in Gov/GDP preferences depending on how I word a poll question. Whenever you come across a blogger saying “the voters will vote GOP but actually agree with the Dems of the issues,” just change channels, you are wasting your time reading that stuff.
America does need better public services, but as the New York case shows higher taxes are not the answer. Rather we need to lower taxes, and then spend the money more wisely. Britain should do the same. I believe 20% of GDP is enough in principle, but given the constraints of politics the UK might want to shoot for a less ambitious target, say the 33% to 35% you see in places like Switzerland and Australia. Unfortunately, even that number is probably out of reach.
The main focus on Britain should be spending their funds more wisely.
PS. How about developing countries? Brazil has a GDP per person of $10,773 ($12,528 PPP). Costa Rica has a GDP/person of $10,166 ($12,874 PPP). Pretty similar. But Brazil has public spending of 39.1% of GDP whereas Costa Rica only spends 18.2%. So Costa Rica presumably has lousy public services. Yet it somehow achieves a Human Development Index rating of .773, well above Brazil’s .730. There are “anomalies” all over the map. It’s not about money; it’s about competence.
PPS. I’ve added the excellent Britmouse to my blogroll, as well as Giles Wilkes, who also has some sympathy for market monetarism (although he disagrees with me on the optimal size of the UK government.) At Marcus Nunes’ blog, Mark Sadowski has a very good guest post on Simon Wren-Lewis’s views on fiscal austerity. Benjamin Cole also does good stuff over there. Philip Greenspun has an amusing post on the view that we work so hard because we are poor:
At the same time, it does seem odd that people work so hard. My parents were Harvard graduates and my father had a great job with the Federal Trade Commission. The five of us shared a 1500 square foot house in Bethesda, Maryland with a black and white TV. My dad rode the Metrobus to work. Mom drove a dark green 1970 Chevrolet station wagon with black vinyl seats and no air-conditioning that broke down on the New Jersey turnpike every few trips to see the cousins. Putting a kid wearing shorts into the car on an August afternoon was bona fide child abuse that could result in first degree leg burns. (Note to youngsters reading this blog: the car did not break down due to advanced age; even fairly new cars in the old days were not as reliable as a 12-year-old Honda Accord would be today.) We attended public school and read books from the library. Our cavities were filled by a dentist who didn’t use novocaine for pediatric patients because it was too expensive and time-consuming. Kids in our (prosperous) neighborhood generally took between 0 and 2 commercial airline flights through high school graduation. We all shared a rotary-dial telephone. I don’t remember any family discussions over why my Dad didn’t take a second job or my Mom a full-time job so that we could have fancier stuff, a bigger house, or elaborate vacations like the lobbyists took their families on (even then lobbying the government was a great way to make money for all concerned!).
My dentist didn’t use novocaine either. That’s what made me a utilitarian.
HT: Jim Ancona
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9. June 2014 at 06:23
Speaking of the IMF and the UK, Lagarde now admits “the IMF got it wrong”.
http://www.bloomberg.com/news/2014-06-08/lagarde-says-imf-got-it-wrong-on-rallying-u-k-economy.html
9. June 2014 at 06:36
Will Paul Krugman be next?
http://www.theguardian.com/politics/2012/may/30/paul-krugman-austerity-deeply-destructive
9. June 2014 at 07:27
WWSHS (What would Sir Humphrey say)?
http://www.bing.com/videos/search?q=yes+prime+minister+episodes&go=Submit&qs=bs&form=QBVR#view=detail&mid=8EBE6FCC083297601E438EBE6FCC083297601E43
9. June 2014 at 07:38
Oh come now, Scott, let’s talk about aligning incentives.
That’s really where you want to do, isn’t it?
If you want good performance, pay for good performance–like they do in Singapore. Isn’t that what you wanted to say?
9. June 2014 at 08:22
Regarding Singapore, Hong Kong, and Luxembourg, not only are these countries small, they are all effectively single cities. If Manhattan declared its independence it would be a very rich country.
9. June 2014 at 08:31
The USA gets really poor value for its money in public infrastructure spending. Here’s a nice list comparing subway construction costs, with some links to earlier posts with more information like this one.
New York City does particularly badly; if it were independent it would still suffer from that. The Netherlands has a line that has gone massively over budget by at least a factor of two– even after doing so, it’s still only one-third to one-fourth of *plans* for subway extensions in New York. Similar for the overbudget Jubilee Line Extension in London– still similar costs Amsterdam’s line, and one-third to one-fourth of the plans for extension in New York.
I haven’t been convinced by any one of the single explanations offered for why the US is so inefficient at public works construction, but the problem’s definitely not raw numbers of dollars spent. It’s the inefficiency.
9. June 2014 at 08:44
If NGDPLT shortfalls were to be made good on the basis of an increase in inflation financed “bad” government spending, that is, the government issues debt to the banks, then the Treasury spends, and the banks sell the debt to the Fed, then MM tells us we must consider this better than the alternative of a shortfall in NGDPLT, with government workers becoming temporarily unemployed, and with RGDP (which of course includes government boondoggles) becoming temporarily depressed.
And yet I see post after post of complaints about government spending and boondoggles.
If government spending and boondoggles are to be drastically reduced, then why include them in you monetary socialist plan? You can’t have your cake and eat it too. If an inflation financed increase in government spending leads to “bad” spending and “bad” output, then it makes no sense to advocate for a target if aggregates that include them. This of course applies to nominal wage targeting as well, because it includes wages paid to boondoggle project public employees.
But let’s keep pretending that it is possible for a legalized counterfeiter to restrain his relative share of total spending in the long run, and let’s ignore history and economic theory both of which point to increasing government in the long run. I need a good laugh every now and then.
9. June 2014 at 08:46
For all the love of East Asia and espeically Singapore, how about measuring the fertility rate. Singapore is the most productive and functional country in the world (and with open immigration) but nobody in the country has many children. The fertility is 1.2 children for fertile female and I believe it is still dropping. This is the same thing as Japan 25 years ago and look where there economy is going. (I guessing the key difference of Japan and Singapore is open borders.)
Why is this? The most competitive functional economies create a lifestyle where people don’t want families?
9. June 2014 at 09:06
Doug, You said:
“If Manhattan declared its independence it would be a very rich country.”
With crappy public services.
And did I mention Luxembourg?
John, I did a post on New York’s subways last week.
Collin, You want high fertility? Try central Africa.
9. June 2014 at 10:23
I’m transplanting a comment I left elsewhere because it’s just as applicable in this case:
“I’ve lost the cite, but I remember reading a study of bus services, showing that for privately operated systems economies of scale ended when bus fleet size reached 500 and diseconomies of scale kicked in when fleet size reached 1000.
Diseconomies of scale in municipally operated bus systems started when the size of the bus fleet reached 2.”
9. June 2014 at 10:55
ssumner
Of course, the highest fertility rates in the world are also the least functional countries in Africa and poorer nations in the Middle East. And most of the highest fertility states in the US are usually in the poorest and least functional states. That is not the right direction either. However, if you look at the Japanese economic experience, there still is a bit of a mystery of why very low rates and high government has not create inflation. Simplest reason why: The population stagnated (esp. the 25 – 45 group) and demand literally can not increase.
It appears the richer we are, the less we can afford those kids. So despite living a much richer world, people are less comfortable creating life.
9. June 2014 at 11:52
From the Wikipedia page on the so-called Australian property bubble-
“This means the great Australian housing bubble has been expanding unsustainably for well over two decades, since the early-nineties, making it the largest, longest lasting and most dangerous bubble (of any type) that has ever existed anywhere in the world in known history.”
An unsustainable bubble that’s lasted no less than two decades. I am reminded of the old story of the valley in the Old West. A solitary cowboy enters the valley at dawn. A quarter hour later, another solitary cowboy enters. Then another, and another, and another, until by nighttime, the valley is filled with solitary cowboys.
9. June 2014 at 12:06
Hi Scott
First and above all, thanks for mentioning my blog. I could do an entire post on the subject of the stuff that reading Money Illusion has taught me, but you would find it frankly embarrassing. And to be fair, Nick Rowe and Lars would have to spend a fair few weeks blushing as well.
Secondly, since you have been so kind as to mention an area where we definitely disagree, I thought a couple of rejoinders are worth making (I don’t expect either of us to change our minds, obviously):#
Within UK accounts, it is worth distinguishing the transfers from the spending on services. The first, called Annual Managed Expenditure (AME, somewhat ironically at times) has been marching ever upwards over time. This is very much a function of our state pension, debt interest and benefits costs.
(you will struggle to find anyone reporting that our benefits entitlements or state pension are that generous)
Departmental Expenditure Limits (DEL) are what pays for the NHS, Education, Defence, Transport and all that. This number peaked in cash terms back in 2010/11 at around £330bn, and the government is currently trying to work out how to make £310bn in cash terms work for 2015/16. The figures pencilled in for 2018 indicate that this will fall to £290bn by then.
Given various fixed technical or political obligations, such as the need (for reasons of demography as much as any other) to have NHS and Education spend (~£150bn of this) rising in line with certain needs (a 70 year old costs 8 times more than a 20 year old say), what this effectively means is that non-health, non-education spending, having been cut in real terms by 25%% by 2015, might need another 20% in just two years.
I think anyone can quite easily write an airy high level piece on public spending and how it ought to be this or that as a % of GDP. But when you drill into the actual numbers and delivery, there are simply nightmarish choices. In the mid to late 1990s, the British had to put up with patients dying on trollies, schools with rain dripping down the walls, and other services that made us frankly ashamed. That was on about 37% of GDP spend. Since then, debt interest and demography add at least 4-5% to the pressures. Getting even down to 40% will take extraordinary political and technical skill.
IF you look at the attitudes to public spending in the UK, it becomes more sympathetic when it is cut to 1990s levels
http://blogs.ft.com/off-message/2013/09/10/where-are-all-the-british-libertarians/
Faced with this don’t be surprised if few UK politicians choose to go out with “What’s the fuss, it’s fine in Singapore/Australia/etc” …!
9. June 2014 at 12:28
“Giles Wilkes, who also has some sympathy for market monetarism”
Understatement of the year?
9. June 2014 at 12:58
CMOT, Nice example.
Collin, Only Keynesians find it mysterious that low rates have not created high inflation in Japan. Milton Friedman understood why back in 1997.
Monetary policy determines inflation, not demographics.
W. Peden, Wonderful example.
Giles, I greatly appreciate the comment and I certainly do understand that perspective. But I don’t think it’s good enough to point out that lower expenditure within the same flawed policy regime leads to worse services. I agree with that. The real need is for thinking outside the box. Hospitals in Switzerland are presumably not falling apart. Singapore provides universal health care at a government cost of 1.2% of GDP. The need here is for radical changes in the basic approach to government. More reliance on having people save for their own future unemployment/medical/pension needs. That may involve forced saving, but even that system is far more efficient than taxes. People are much more careful in spending their own money than the government’s money.
Here’s where we may agree. The radical changes I am proposing are not something the Cameron government would be able to implement. You need decades of debate, and then a change of heart in both parties, before that sort of durable change could be enacted. As an analogy, it would have been politically impossible to implement Thatcher’s reforms in 1959 or 1969. The country wasn’t ready yet.
I don’t think public opinion is useful here. The public follows, they don’t lead. They don’t even know that Australia and Switzerland offer alternative models at lower cost. All they saw in 1997 was a poorly performing British model.
Vaidas, I hope so, but I didn’t want to sound presumptuous. 🙂
9. June 2014 at 13:04
Collin,
This might be of interest
http://www.halfsigma.com/2006/05/resourceinsecur.html
9. June 2014 at 13:32
“My dentist didn’t use novocaine either”
Mine either, and I at least once remember him saying the old drill, the one that did not spit water, was better at doing some precise work. Just after that I felt some intense pain.
9. June 2014 at 13:54
Vaidas – indeed! Though I hope I not a thoughtless zealot. I long for a falsifiable proof.
Scott, I think we probably agree. I need to examine the example of other countries. I am a bit more short termist than you are (and it may well be the short term nature of today’s issues that led me to agree with 90% of this blog, rather than 50%). All I can note for now is that we have short term spending targets that seem to me to require those decades of debate, and no sign that the political class is even starting the conversation.
9. June 2014 at 16:08
Cut government spending!
OT but interesting: Tyler Cowan recently put Singapore’s health outlays at 4 percent of GDP…
Thanks Scott.
9. June 2014 at 16:40
Really this is *insane*. The UK is deficit spending like mad, they are *saying* they are practising austerity which your spreadsheet link shows has not happened yet.
Go back to 2008. Back to 2009. Back to 2010. Back to 2011. Back to 2012. Get all the ONS predictions on the UK. They always do the same thing, have one to two years of the mess we have now, then it magically picks up. And they roll that forward by a year every year. For cuts they do the same thing.
10. June 2014 at 05:35
And what it shows is that the UK will plunge from public spending on a par with Germany in 2009, to spending less than the US by 2017.
Only in proportional terms, not absolute per capita PPP dollars. Which is kind of silly — both of these countries are significantly poorer than the United States. No one would argue Americans are relatively underfed compared to other countries, even though other countries generally spend more on food as a percentage of overall consumption.
Here’s a better comparison of government spending per capita:
New Zealand $12,252
Australia $13,819
Spain $14,771
Canada $16,655
Italy $16,811
Germany $17,263
United Kingdom $18,155
France $18,866
United States $19,266
10. June 2014 at 05:53
why the US is so inefficient at public works construction,
Relatively decentralized population, relatively heavy regulatory state are the biggest. Public transport efficiency is generally a function of population density.
I remember being shocked at the cost of the Tappan Zee expansion relative to what it cost to build originally, it was something crazy like 50 times more in real dollars — the impact studies and planning stages alone cost more than the original bridge. And it’s still in the wrong place because of inter-governmental turf wars.
10. June 2014 at 05:59
Thanks Giles, That’s a good point about the fact that cuts are being made without reforms.
Ben, The 4% figure is correct, the government’s share is 1.2%.
TallDave, Yes, Mankiw made that point. Do you know the original source of the data. The link is a spreadsheet, but I didn’t see the source.
10. June 2014 at 06:13
@Collin you wrote:
And most of the highest fertility states in the US are usually in the poorest and least functional states.
It does not look that way to me:
http://en.wikipedia.org/wiki/List_of_U.S._states_and_territories_by_fertility_rate
10. June 2014 at 07:14
Scott — I have the source listed as the OECD’s 2011 edition of Government At A Glance.
http://www.oecd.org/inclusive-growth/Government%20at%20a%20Glance%202011.pdf
10. June 2014 at 07:45
TC has an interesting post on reforming PEMEX (link below).
Let me add some thoughts relevant to on-going conversations here.
In Hungary, I did a good bit of privatization and consulting work for various government ministries and state-owned enterprises. This included Hungary’s oil company, MOL, which I knew both before and after privatization.
Here are some central principles regarding SOEs which I derived from the experience:
1. Institutions assume the objective functions of their owners. If the Mexican government has a controlling interest in PEMEX, then PEMEX will reflect the policy priorities of the government over time.
2. Governments seek to maximize political acceptability subject to budget constraints.
What is politically acceptable in Mexico?
a. High employment
b. Job security
c. National autonomy (via state ownership)
d. Various industrial / developmental policies
e. Social programs
What is the budget constraint in Mexico?
a. Cash flow from PEMEX for the government budget
b. Cash flow from PEMEX to maintain PEMEX production levels
c. Cash flow from the government to fund PEMEX capex
Political acceptability and budget constraints will continue to conflict in the government’s handling of PEMEX. To allow PEMEX to operate efficiently, the route with the best odds is privatization. Personally, I would float 25% of PEMEX on the NYSE, and be prepared to float another 25.1% a year or two thereafter. The government could retain a minority or golden share. Both seem to work OK.
The key is not regulatory reform, but rather to allow PEMEX to operate under a different objective function. (And yes, Scott, we are aligning the interests.)
So, to reiterate, the principles above are central, and they derive not from theory (OK, I could give you theory, too), but from observed behavior.
1. Institutions assume the objective functions of their owners. This is why SOEs are almost always problematic in terms of efficiency and profitability.
2. Government officials and politicians seek to maximize political acceptability (admittedly a woolly concept), subject to budget constraints. They do not maximize growth or fiscal sustainability, unless that is the politically acceptable policy.
And let me add a third:
3. If SOE management is given conflicting objective functions, then management will escape accountability to owners. For example, imagine that SOE management is told to maximize revenues and profits, as well as maximizing employment and keeping selling prices artificially low. Under such circumstances, it is impossible to tell if the company is doing well. It will probably be making a loss. Therefore, it is also impossible to tell if management is managing well, and the company is virtually impossible to benchmark. This in turn facilitates corruption, both within the SOE and between the government and the SOE. (MOL was used as a slush fund prior to privatization.)
At the same time, SOE capital expenditures will become part of national budget negotiations. For example, the capex of PEMEX (broadly, EBITDA minus transfers to the government) will be a function of, say, Mexican national healthcare spending. The Finance Minister will allocate the funding based on political acceptability. The amount of cash taken from PEMEX (more starkly, PDVSA lately), will be a function of internal negotiations within the finance ministry and between ministry officials and national politicians.
PEMEX business needs will not–repeat, not–be the primary driver of PEMEX’s revenues, cost structure, capex or cash flow. This is one source of unending frustration to SOE management, who is simultaneously unaccountable and impotent.
(http://marginalrevolution.com/marginalrevolution/2014/06/how-easy-will-it-be-to-turn-around-pemex.html#comments)
11. June 2014 at 02:06
Simon Wren Lewis doesn’t understand why we hate fiscal expansion at the ZLB (or is that “ZLB”) so much: http://mainlymacro.blogspot.com.au/2014/06/monetarist-vs-fiscalist.html
Wow, I didn’t even notice you didn’t have Britmouse up until now, there’s no excuse for that!
11. June 2014 at 04:44
Thanks TallDave.
Steven, Good points about Pemex. And their gas stations engage in credit card fraud.
Saturos, Yes, shameful.
12. June 2014 at 00:40
People in Britain don’t seem to realise, according to the Guardian, that the success of a country is measured by how massively the government spends its money on the public sector.