Reengi­neer­ing gov­ern­ment

Financial Mirror (Cyprus) - - FRONT PAGE -

Since the fi­nan­cial cri­sis erupted in 2008, gov­ern­ments in ad­vanced coun­tries have been un­der sig­nif­i­cant pres­sure. In many coun­tries, tax re­ceipts abruptly col­lapsed when the econ­omy con­tracted, in­come dwin­dled, and real-es­tate trans­ac­tions came to a halt. The fall in tax rev­enues was in most cases sud­den, deep, and last­ing. Gov­ern­ments had no choice but to raise taxes or to ad­just to leaner times.

In some coun­tries, the mag­ni­tude of the shock was such that a large tax in­crease could not fill the gap. In Spain, de­spite tax hikes worth more than 4% of GDP since 2010, the tax-to-GDP ra­tio was only 38% in 2014, com­pared to 41% in 2007. In Greece, tax in­creases amounted to 13% of GDP dur­ing the same pe­riod, but the tax ra­tio in­creased by only six per­cent­age points. Else­where, po­lit­i­cal lim­its to tax in­creases were reached be­fore the gap could be filled. Will­ingly or not, pri­or­ity is be­ing given to spend­ing cuts.

Dis­il­lu­sion about fu­ture growth adds to the pres­sure. The pro­duc­tiv­ity record has gen­er­ally been weak over the last few years, and this sug­gests that growth in the years ahead could be slower than pre­vi­ously ex­pected. Rev­enue growth thus looks in­suf­fi­cient to match the surge in age-re­lated public spend­ing on health and pen­sions.

This is a very dif­fer­ent cri­sis from those ex­pe­ri­enced in the 1980s and the 1990s. Back then, the main is­sue was po­lit­i­cal: the le­git­i­macy and ef­fi­ciency of public spend­ing was un­der attack. In the words of US Pres­i­dent Ron­ald Rea­gan, gov­ern­ment was the prob­lem, not the so­lu­tion. The state, it was loudly pro­claimed, had to be rolled back.

By con­trast, to­day’s con­cerns are eco­nomic. Par­ti­san dis­agree­ment about the proper scope of gov­ern­ment re­mains, but there is no over­all re­jec­tion of state in­ter­ven­tion. Of­ten, it is not in­ter­ests or ide­olo­gies that make public spend­ing cuts un­avoid­able – just facts.

How can gov­ern­ments rise to the chal­lenge? The risk they face is clear enough: ab­sent a pro­found reengi­neer­ing, in­er­tial spend­ing – ow­ing to en­ti­tle­ments and civil-ser­vice wages – is bound to crowd out spend­ing on new pri­or­i­ties and new poli­cies.

Al­ready, the coun­tries that have been forced to cut the most have gen­er­ally sac­ri­ficed public in­fra­struc­ture in­vest­ment. Re­search is an­other area at risk. So­cial in­vest­ment in pro­grams that pay off over the long term, such as pre-school child care, is suf­fer­ing from fi­nan­cial con­straints. Na­tional se­cu­rity is not given the pri­or­ity it de­serves, de­spite grow­ing threats. Last but not least, makeshift so­lu­tions such as pro­tracted wage freezes may even­tu­ally erode the qual­ity of public ser­vices.

For­tu­nately, there are a few things gov­ern­ments can do to mit­i­gate the ef­fects of in­er­tial spend­ing. For starters, they can sim­ply sys­tem­a­tise eval­u­a­tions of the ef­fi­ciency of public money. In most coun­tries, such as­sess­ments are still rare and hap­haz­ard: Par­lia­ments of­ten en­act poli­cies with­out know­ing whether they are worth the money, and it may take a very long time be­fore in­ef­fec­tive or in­ef­fi­cient poli­cies are ter­mi­nated. That is why en­abling leg­is­la­tion for spend­ing pro­grammes should con­tain sun­set clauses, with ex­ten­sions sub­ject to in­de­pen­dent eval­u­a­tion.

Sec­ond, spend­ing re­views, too, should be sys­tem­a­tised. Set­ting pri­or­i­ties – whether to spend more on ed­u­ca­tion and less on pen­sions, for ex­am­ple, or whether to in­vest in in­fra­struc­ture or in re­search – en­tails hard choices that should be made ex­plicit. In an ideal world, th­ese choices would be the fo­cus of elec­toral de­bates and par­lia­men­tary work. But be­hind ev­ery bud­get line is a con­stituency tempt­ing pol­i­cy­mak­ers to es­chew hard de­ci­sions. That is why struc­tured spend­ing re­views are use­ful: they force of­fi­cials to bridge the gap be­tween ends and means and en­cour­age in­formed demo­cratic de­ci­sion-mak­ing.

Third, gov­ern­ments should equip them­selves with a reengi­neer­ing bud­get. As pri­vate com­pa­nies know, trans­for­ma­tions – deep changes in the way things are done – of­ten cost money be­fore they bring sav­ings. This may be be­cause the changes re­quire in­vest­ment in new tech­nol­ogy, re­train­ing of em­ploy­ees, or sim­ply buy­ing stake­hold­ers’ con­sent. Money ear­marked in the bud­get for such reengi­neer­ing of gov­ern­ment pro­grams would be a good in­vest­ment.

Fourth, gov­ern­ments should pro­mote public-sec­tor in­no­va­tion. Con­trary to popular prej­u­dice, lo­cal gov­ern­ments and public agen­cies do in­no­vate; what is miss­ing is a mech­a­nism to se­lect and dis­sem­i­nate in­no­va­tions in the same way the mar­ket se­lects new prod­ucts or cost-sav­ing pro­cesses. A bet­ter way to de­liver a public ser­vice may re­main un­known for years. That might well change if gov­ern­ments took sim­ple steps like al­lo­cat­ing more fund­ing on a project ba­sis and or­gan­is­ing con­tests. For ex­am­ple, schools in dis­ad­van­taged neigh­bour­hoods should be al­lowed to ten­der for funds for ed­u­ca­tional in­no­va­tion.

Last but not least, peo­ple should be em­pow­ered. Cit­i­zens want a more nim­ble state that tai­lors its op­er­a­tions to lo­cal needs. In the dig­i­tal age, they want it to meet new stan­dards of speed, re­li­a­bil­ity, and per­son­al­i­sa­tion. They in­creas­ingly chal­lenge the tra­di­tional view that ef­fi­ciency and equal­ity im­ply less in­di­vid­ual choice. And they want the gov­ern­ment to be open, to guar­an­tee ac­cess to data, and to make its ef­fi­ciency and ef­fec­tive­ness di­rectly ob­serv­able.

Th­ese are pow­er­ful forces for change, and em­bat­tled gov­ern­ments should har­ness them to the goal of achiev­ing the reengi­neer­ing they so ur­gently need. The al­ter­na­tive is to ac­cept the de­te­ri­o­ra­tion of the qual­ity of public ser­vices, which would lead only to a loss of gov­ern­ment le­git­i­macy and, with it, a di­min­ish­ing will­ing­ness to pay taxes.

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