22 March 2007

Costing social goals

From the summary of New Zealand’s Spending Binge (pdf, 365k):

  • Core government spending is now almost NZ$20 billion a year higher than it was in 2000, a 32% increase in real terms.
  • Total government spending now makes up 40% of GDP, compared to 35% in Australia.
  • The available social indicators we have show negligible improvements since 2000. Life expectancy, infant mortality, hospital outputs, literacy, violent crime, suicide, poverty and income inequality have barely changed despite a massive increase in social spending.
  • Around the world there is little relationship between higher public spending and better social outcomes.
  • A major explanation for why this spending has been ineffectual is because of middle class welfare. A large proportion of government spending is simply recycled (or ‘churned’) straight back to those who paid the tax in the first place.
At first sight, the conclusions seem unarguable, and I’m not going to argue against them. What I would say is that they are not going to precipitate a radical improvement in the way we do things. You can imagine the counter-arguments: sure the indicators listed above haven’t improved much, but there are others that have. Or: there are mitigating circumstances, such as a rise in oil prices, larger numbers of people on welfare, an aging population, a decline in our terms of trade etc. In short, there is a sense that we are not getting value for money from the taxpayer dollar, but there’s little in the way of proof.

That itself, though, is grounds for concern. We have strong suspicions that government spending could be more efficient; that middle class (and corporate) welfare is wasteful and, if it were transparent, would be unpopular; that more broadly, the gap between government – even the government of a population of 4 million – is widening. But, as another of the report’s conclusions says:

  • The [New Zealand] government has little specific information on how effective [its] extra spending has been. We lack information on outputs and outcomes from the public sector, which makes it difficult to measure exactly what return taxpayers are receiving for their investment.
It’s not just that we can’t measure the return on the taxpayer dollar: it’s that we cannot monitor whether particular policies, programmes, strategies or activities are better or worse than what we have at the moment.

A Social Policy Bond regime would be different: the targeted outcome would be costed by the market, under competitive bidding. The value of the bonds would rise and fall continuously, according to how remote the market thinks the outcome is to being achieved. Such information is invaluable to potential investors in the bonds, as well as policymakers. It tells them, and anyone else, which projects are likely to succeed. More compellingly, it tells us which projects should be terminated – something that happens all too rarely under the current system, where taxpayer-funded institutions and activities have their own momentum that keeps them going well after their ‘best-before’ date.

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