Wednesday, 30 March 2011

The Case for Public Spending

Contrary to what the Government believes public spending can actually be a driver to economic growth. In the developed nations in the world currently Governments are spending on average 40-60 percent of GDP on public spending. Some rabid free market devotees argue that public spending should be reduced to around 20 percent of GDP, where we were in the 1920’s. Some African nations are at that level of public spending now.

Perhaps it should be at 30 percent of GDP, that’s where we were in the 1960’s and that’s where some South American nations are now. But modern economies are in bands of between 40 to 60 percent.

Public expenditure is a driver of economic growth. Take infrastructure for example. Private companies historically do not invest in infrastructure. The road and transport system, the electricity system, the telecom system, the postage system, the water and sewerage system, all historically in most countries over the past 140 years have come about through public spending.

Second there is the “soft infrastructure” that is public services such as the health system, the libraries, the universities and poly techs. The stuff that supports the growth and development of people; the stuff that supports and generates a highly educated and skilled work force. As economies grow the demands become more complex and the demands grow the demands become more complex and you need an increase in education and more higher education. That is why services continue to grow as economies grow.

The reason this has been done historically through the public sector is because it is more efficient. The clearest way you can see this is through health care. Look at the USA, which has conducted a unique experiment of trying to run privately funded health care. The USA spends twice as much of its GDP on health care as do most other developed countries on average and its get worse results in terms of health outcomes per head of population than most other countries. It has the 33rd place in terms of life expectancy among developed countries and in terms of child mortality rates the USA has rates twice that of the Czech Republic. So private health care is both expensive and inefficient.

If we look more broadly across various sectors we see empirical studies comparing delivery of services across a range of sectors from health, water, electricity, education and prisons that in terms of comparing efficiency between private and public agencies the results come back that there is no superior efficiency in private performance.

National has said our public service is “bloated and inefficient.” Yet there is no evidence that it is. Total public sector employment in New Zealand includes health and education workers and is about 13% of the total workforce. Core public sector workers are just over 2% of the workforce. Massive problems were caused when the New Zealand public sector workforce dropped to well below 2% of the workforce in the 1990s. Instead of strengthening public services the Government is planning to sell public services off. It has announced plans to “partially privatise” three electricity SOEs and Solid Energy and increase the private ownership of Air New Zealand and has entered into “Private-Public Partnerships” (PPPs) in schools and prisons and is considering them in hospitals, courts and elsewhere. The argument used is the same argument that was used in the 1980s and 1990s: that PPPs and privatisation are necessary and efficient ways of reducing government expenditure.

Using this claim supported by no evidence the Government has cut expenditure and reduced the size of the public sector workforce job saying that New Zealand’s level of Government expenditure is too high when this is not the case. New Zealand’s level of government expenditure is lower on average than other OECD countries and lower than the average of other small OECD countries. We spend much less than France, Germany, Denmark, Sweden and Norway who spend near to or above 50% of GDP on government expenditure.

Public spending provides health and education services; it builds roads, provides electricity and water and delivers these more efficiently and effectively than the market could provide. Public services provide a “social wage” by producing for everyone services that people otherwise could not afford. Public health education, housing and other services protect people from illness and allow greater development of individual and social capability through a healthier and better-educated population.

The economic crisis was not caused by government deficits but worldwide public spending was one of the measures used to manage and recover from the recession. Public spending is important in achieving greater equality: through redistributing money to those on low incomes, it increases spending power.

We depend on the public sector to be responsive in times of our crisis. Consider how quickly public services have responded to the natural disasters in New Zealand – most especially the Christchurch earthquake and the Pike River Mine tragedy. Citizens have high expectations of public services to respond in times of emergency. This response cannot be created instantly: it requires us to maintain a public service with the experience, knowledge and capacity to take action with little notice.

There is a strong link between public spending and economic and social development. Good government has critical roles in regulating the economy providing services, redistributing income and stabilising the economy in difficult times. Our strong social security system was able to absorb the worst effects of the economic crisis and provided protection to New Zealanders who lost their jobs because of the recession. If National had been in power when Labour was the recession would have been deeper and longer. We could even have been staring down the barrel of economic meltdown like many European countries are now.

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