Fit for purpose? Are Kiwis getting the government they pay for?

18 Sep 2018

Government plays a big part in our lives, and much of it is necessary and beneficial.

We, the public, have come to entrust it with the control of a major proportion of the nation’s income and resources. For example, on the OECD’s measure, each year government in all its forms is spending over 40% of gross domestic product (GDP).

We want it to do a good job on our behalf. But we do not make that easy for it. This report looks at how good a job it is doing in its spending, producing and regulatory roles.

The report does not intend to be controversial. People with very different ideologies should be able to agree that government efficiency matters. Government waste harms wellbeing. Who would not want to see the state achieving better outcomes from its efforts, be they in housing, health, education, welfare, crime, the environment or anywhere else?

Regrettably, the report finds compelling evidence of a lack of focus on productivity in the state sector, and thereby great waste.

One international study by the Fraser Institute assessed that if government spending in New Zealand were as efficient as in South Korea, it could be one third lower for the same outcomes. On that indicative calculation, wasteful government spending is around 13% of GDP. That represents $20,000 per household, annually.

The wastage is likely much more significant in relation to income than in the distant past. Central government taxes have risen four times faster than incomes since 1900. Taxes are now around four times greater than the cost of core central government protective and administrative functions. The bulk of central government spending today is redistributive.

Indeed, our tax burden, at 32.8% of GDP for general government in 2016 on the OECD’s measure, was among the highest in the world outside Europe. Of 62 prosperous countries with sizeable populations, Botswana was the only nonEuropean country to have a higher tax revenue to GDP ratio than New Zealand on the Heritage Foundation’s 2018 database. Among Anglo-Saxon countries, only the United Kingdom came close.

Other researchers have looked at the productivity of health and education spending across countries.

In education, an OECD efficiency analysis found that spending could be cut by around one-sixth in New Zealand without impairing outcomes if international best practice efficiency could be achieved. The government is spending more than $8 billion a year on school education – a saving of one-sixth could make a big difference to outcomes if wisely spent.

For example, such savings could be used to improve outcomes for the roughly 17% of students who reach age 15 without achieving basic literacy on the PISA scale. Government has likely spent more than $130,000 each on their schooling.

In health, even officials widely agree about the lack of focus on productivity. International research suggests that perhaps one dollar in four is being wasted compared to best practice. Potentially we could reduce annual health spending by around 2.5% of GDP without impairing outcomes.

The above efficiency calculations are largely motivational. They do not show what New Zealand would need to change or whether such changes are plausible. Their value is in pointing to the potential utility of such an inquiry. We should learn from countries that are doing better.


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