Saturday, January 26, 2008

The Myth of Bloated Bureaucracy

A really interesting new web site is Entitleme. The site provides a calculator that allows you to compare the amount of tax you pay in New Zealand and Australia at various income levels, factoring in any rebates and tax credits.

Also interesting are the pie graphs in the bottom part of the page, which show how those tax dollars are spent by the government. Take a look at the sliver that takes up 4.3% of the New Zealand pie called 'core government services'. This is the name for all the ministries and departments that make up what used to be called 'the public service', and I believe also includes prisons.

More on them in a minute, but first, consider the size of the pie itself. The proportion of the country's gross domestic product taken up by government taxation and spending is a source of considerable angst for many neoliberal pundits. In New Zealand, it is between 35 and 40 percent, depending on who you believe. This is about the OECD average. Nevertheless, Business Roundtable think pieces and op-eds from hawkish economicsts go to considerable lengths to argue that it's too high. Some have suggested that there should be an agreed, or even legislated, limit on the government's share of GDP -- given wholesale acceptance of Milton Friedman's pronouncement that most of what the government does is a dead loss to productivity.

These pundits often salt their economic jargon with talk about 'bloated bureaucracy', and place a lot of emphasis on the increase in the number of public servants under the current government. They give the impression that the salaries of chaps in ties take up a significant chunk of taxpayers dollars. A common anecdote is about the increase in central Wellington office rents over the last couple of years, due to demand from the various ministries. Some even go so far as to blame the country's macroeconomic ills on the hordes of 'pdf pushers' spilling out of offices along Molesworth St and The Terrace, claiming that their high wages are creating inflation and pushing up interest rates.

It may therefore come as a surprise that, as a burden on the country's economy and taxpayers, the cost of the public service almost fails to register.

A look at the Entitleme pie confirms this. New Zealand's GDP is about $160 billion NZD. Let's go with the worst case scenario and take the government's share of that to be around 40 percent -- $64 billion. The amount spent on 'core government services' (bureaucracy) is therefore 4.3 percent of this number -- about $2.5 billion.

That still sounds like quite a lot. Surely if you slashed the bureaucracy a bit, it would ease the deadweight burden on the economy? Ok. Let's say we entirely eliminate every bureaucrat, every government job, every department, ministry, commission and quango. This would free up the same amount of money as if New Zealand's GDP grew by 3 percent, rather than 2 percent, for just one year.

Yes, just one extra good year of dairy prices and tourism would create enough extra money to compensate for the wages of all 40,000 pdf pushers who squirrel away generating paper, or whatever it is they do.

What say you, the hardworking productive taxpayer, decide not to be so generous, and insist on firing the lot of them. Wouldn't that bulk up the hip pocket? Well, if you divide that $2.5 billion among New Zealand's 2.1 million taxpayers, there would be enough for an average tax cut of about $20 a week. At current prices that would get you maybe two-and-a-half beers.

Of course, there would be nobody to keep a record of how much tax you had paid, let alone check whether it was the right amount or what it had been spent on. And if you were to write a letter demanding answers on any of these issues, be prepared for the $120 'processing fee' that, say, Electorate Communications Consultancy Services would charge you for a standard answer (I'm basing the amount on what it costs foreigners to apply for a New Zealand visa).

Moral of the story, if there is one? Go ahead and believe, based on evidence or simple prejudice, that there are too many government bureaucats, and that they are overpaid and unproductive. Bemoan the fact that they are raising prices for office space in a few Wellington streets that could better used by, um, firms of lawyers and accountants. But don't take seriously the idea that they are somehow sucking up large portions of the country's wealth.


gjr said...

Your post seems to be largely tackling some of the issues we were talking about last Friday so I feel I should make some sort of statement as I can now get that word in edgeways. (And that's not to say you didn't annihilate me in that discussion - your breadth of knowledge humbles me).

While I wouldn't say that government workers are overpaid and unproductive I would have questions about the number of them. I'm far more questioning than I used to be about whether government should actually be doing something than I was the last time I lived here. It would be interesting to see some stats about the number of bureaucrats as a percentage of the overall workforce and how this compares to other countries over a long period so you could see the effects of different governments and economic conditions. Also the (perceived?) increase in regulations which imposes costs and delays on any undertaking (though I did see in one of your links that NZ ranked number 2 in ease of doing business. Not sure how that affects what I'm saying).

The government here strikes as being really quite well run and on budget and I always feel somewhat sorry for government in a way as their mistakes are laid out openly for all to examine and criticize whereas in the private sector it's all ignored, hidden and swept away.

My concerns are more based around the notion that given more money it will surely be spent. It is something we all do. Given the tendency of the public to always demand that government fix any problem that appears in our society, combined with a party that seems keen to solve any problem that does exist, it is no wonder the size of our government is increasing as we have been through a period of economic good times.

Perhaps fiscally conservative/small government governments serve the same roll as a recession does to the private sector - trimming bloated budgets, forcing cuts where possible and making everyone justify where the money is going.

That all said why anyone ever expects anything close to perfection from a government I've never understood, frail humanity toiling away at the toughest issues that the market either messes up or shies away from. Not a recipe for the kind of success we so often find here.

And as your posts allude to, the government and its workers are always an easy target for the media when usually the story is a lot less serious and more complex than anything near what they have made it out to be. Maybe we can start a new tagline to replace "I blame the Labour government" with "I blame the mainstream media".

Simon Bidwell said...

I'll respond to your comment tomorrow Gavin -- in the meantime apologies for not letting you get a word in edgeways. Blame the excessive verbosity on the wine maybe.

Terence said...

Hello again Simon,

I blogged on this a while ago. The other thing you don't hear from the BRT is what the big ticket items we spend our tax dollars are: health and education. If one wanted to cut taxes to the rate they'd like to see them they'd have to gut the public provision of these services too. Which is something you don't hear them promising so loudly - I wonder why.