Skip to Content

Coffee House

Pulling off a public finance rescue mission

16 September 2010

5:14 PM

16 September 2010

5:14 PM

This is the next of our posts with Reform looking ahead to the Spending Review.
Earlier posts were on
health, education, the first hundred days, welfare, the Civil Service, international experiences (New Zealand, Canada,Ireland) and Hon Ruth Richardson’s recent speech and selling the case for cuts to the public.
 
George Osborne was right to frame the forthcoming UK Spending Review as a once in a generation opportunity to reshape government.  While it is convenient to see the current fiscal debate as
cyclical, the truth is that heavily indebted countries such as the UK have a structural problem rooted in the overreach of government. So Mr Osborne will succeed if (and only if) he changes the
four ways in which government intervenes – as spender, tax collector, asset owner and regulator.

New Zealand is an example of what can be done.  The Fiscal Responsibility Act, which I introduced in 1993, made it the first country to subject the government accounts to private sector
disciplines.  It also committed the country to frequent and high quality disclosures of not just the fiscal numbers but the strategy.  As a result it created an institutional framework of
fiscal accountability, mirroring the creation of an independent central bank by the preceding NZ government.  As a result New Zealand weathered the Great Financial Collapse without a crisis in
its public finances and today has one of the lowest government debt-to-GDP ratios in the OECD.

The coalition has rightly pledged to reduce the quantity of public spending, especially in the biggest budgets of health and welfare.  But here the coalition is caught between bad promises
made on the campaign trail and its new understanding of what has to be done in office.

A case in point is the election promises to maintain “middle class welfare” like child benefit.  This is unconscionable in an age of austerity where scarce resources must be
preserved for the most worthy of causes. It is perverse to protect spending on the better off yet make eye-watering cuts in other areas of spending.


My counsel to the coalition is to make the case to the voting public that in the current circumstances, welfare worthy of the name needs to be always targeted.  I abolished universal child
benefit within six weeks of taking office (with protection for families on low incomes).  It can be done.

The other priority is to ensure genuinely credible external constraint on the conduct of fiscal policy.  The Office of Budget Responsibility matters because while a government will never
surrender ultimate authority for fiscal policy settings, the power of scrutiny mitigates against poor fiscal decision-making.  But the Office will lose its legitimacy at any suspicion of
political interference.  HM Treasury’s forthcoming legislation should confer the same kind of operational independence as that which was so successfully conferred on the Bank of England.

On tax, the challenge is that the tax system has been made to serve too many masters, in particular welfare. George Osborne and Iain Duncan Smith are not the first to have to struggle with the
trade-offs between the benefit level, making work pay and the cost. The answer here is time-limiting benefits – that is, establishing a maximum length of time for which any claimant can receive a
benefit. This idea, which embodies the principle that welfare should be temporary, is practised in other countries.  The 1996 welfare reforms of President Clinton, for example, set a maximum
of five years of cumulative welfare assistance.  In the UK time limits are supported by Frank Field, the former Minister for Welfare Reform.

The carnage in the financial sector has washed up many institutions into public ownership in the name of preserving financial stability.  Governments now find themselves accidental owners and
must extricate themselves.  But the temptation is to maintain the halfway house of partial ownership.  Partial ownership carries with it the expectation of an implicit government
guarantee.  Trouble struck the partially privatised Bank of New Zealand just as I became the Minister of Finance in 1990.  It became clear that while the profit was privatised, the risk
was socialised.  Full privatisation was the ultimate and successful outcome.

Equally, public service assets such as health and education facilities need not be in government ownership.  There are plenty of precedents demonstrating that with different management
(schools) and different ownership (hospitals), private and not-for-profit entities can do a better job at driving and delivering superior service performance.  The temptation for Michael Gove
and Andrew Lansley will be to foster a small element of new provision alongside the existing public system.  They would do better to change the incentives within that system, for example by
allowing good schools to expand.  The cost of new school places is much lower in existing schools than in new ones.

While the tax burden is often cited as an impediment to growth, the regulatory burden is just as pernicious.  New candidates for legislative intervention arise from the clamour for constrained
financial markets and climate change mitigation.  Old interventions and labour market laws have exacted a huge toll on job creation, while planning and building regimes have conspired to deny
many affordable housing.  The coalition should consider applying an institutional discipline such as a code of regulatory responsibility to govern its deregulatory programme.  The
Productivity Commission in Australia has an excellent pedigree in policing the creation of new regulation.

The necessity to conduct a public finance rescue mission is a familiar and typically crisis-driven task.  Imposing a lid on public spending increases, eliminating waste and salami-slicing
budgets tend to be the politicians’ stock answer, but none of these approaches go to the heart of the problem. Instead the Spending Review should aim to limit government to its core business,
to forge a political culture of reform and devise institutions that buttress sound policies.  George Osborne should confront the undeniable political challenges because the results of reform
– better, more accessible public services in harness with a more dynamic private sector – would be the strongest validation of his record.
 
Hon Ruth Richardson was Minister of Finance in New Zealand 1990-93.  Her paper on the reform of government for the think tank Reform is available here


Show comments
Close