I attended an event yesterday which looked at options to increase productivity and innovation in Australia.
The good things first:
1) Both sides of politics in Australia seem to agree that governments should not pick winners.
2) Everyone agreed that that competition needs to be beefed up and a reform zeal of the sort experienced in Australia in the 1980s and 1990s is needed again.
However, the big elephant in the room – the level of fat in the government – was only tangentially alluded to by some of the speakers.
At drinks, one of the attendees with whom I was having a chat suggested that this is not really the big elephant that I’m making of it. He noted that the size of government has remained relatively constant in Australia as a share of GDP. But there are problems with this way of thinking.
The first problem is that government expenditure is equated as output for purposes of GDP calculations. While the rest of the economy’s output is market-tested (hence represents genuine, i.e. optimal, value), government output today is well in excess of the optimal level in practically every area of government activity. When people spend their own money it is used for things that provide the greatest value. When governments spend money it goes into things that bureaucrats like. The preferences of bureaucrats are often inefficient and biased towards their self-interest. I think I’m qualified to make such a comment based on my 33 years of experience in governments.
But there’s another issue. No business can survive if it doesn’t keep on improving its productivity. A good business tends to produce more with increasingly fewer staff. That’s the essence of productivity. But in the government, the number of staff either increases every year or at least remains constant as a proportion of the total jobs in society.
When every other industry is doing more with less, why should the government do the same with more? There needs to be a steady attrition in the total number of government employees by 1 or 2 per cent per year. There should be economies of scale (we need fewer government employees per citizen as the population of the country increases) as well as a productivity dividend from the application of technology. The size of government must reduce over time. The fact that the size of government tends to grow with a growing economy tells us that fat is being accumulated.
Finally, if a business doesn’t keep on cutting its costs and improving its output, it won’t survive in a competitive world. The government does not experience such pressure. A government usually doesn’t go bankrupt even if it reaches the peak of inefficiency compared with the private sector.
In sum, I suggest that the biggest problem Australia faces today in terms of the low productivity it has experienced in recent years is the sheer size of governments.
Cutting the number of government employees by 2 per cent per year for ten years will cut unproductive expenditure and put money back into the pockets of the people – who best know how to spend it in the most productive way. That will also create opportunities for businesses and increase incentives for innovation.
And yes, swathes of government-owned or managed industries probably need to be privatised, as well (I won’t go into details since there might be some conflict with my current policy advisory role, but I’d say that one doesn’t have to look far to find such sectors).
Of course, none of the other reforms suggested at the event (e.g. competition and regulation reforms) are redundant. These do need to be implemented. But these reforms, in isolation, will hardly make a dent into the problem of low productivity. Taking a scalpel to the vast stores of fat in the bowels of various Australian governments, when implemented along with these other reforms, will make a real difference. All governments should come to an agreement on a ten year plan to incrementally reduce the size of government.