Waste Not, Want Not: It’s Harder Than It Seems.

This was prepared as a Listener economics column on the assumption that National would propose fiscally prudent tax cuts, based on their cutting ‘waste’ (they mean ‘programs’). However, when National announced the size of its cuts, I canned the column for another. It wont be used, because its ‘news’ significance will have gone after the election, although no doubt I shall cannibalise some of it. I am putting it on the website for the record.

Keywords: Governance; Regulation & Taxation;

Other articles on the 2005 Election Tax Debate

Politicians “are talking as though it will be easy to cut enough fat from the state to pay for tax cuts – it won’t be. Believe me I’ve been there and I have done that. The combination of the State Enterprises Act, the Public Finance Act and the State Sector Act, which I helped to design and implement, brought remarkable improvements in the effectiveness of public organisations and lower costs. I wrote a textbook about it. But those systems have not been used vigorously for a while and some slack has got into the system. We can get better value for money but it has to be done with a scalpel not an axe. … Designing tax cuts is child’s play. It is on the expenditure side where all the problems are and where skill and experience are needed.” (Graham Scott)

The opening quotation by ACT party-list candidate Graham Scott, who worked in Treasury for thirteen years, seven of which he was Secretary of the Treasury, will generate a warm response from every Treasury official. Their job is to raise the tax, while all the other departments spend the revenue. The challenge is how to spend it effectively.

It is easy to confuse whether the objective of the expenditure is worthwhile and whether the expenditure on a worthwhile objective is effective. Consider hip-hop – a dance music genre with rapping, originating from black American street culture. Many readers will have views on whether such activities should be supported by the state. They could be entirely selfish – they are not interested in hip-hop, and do not want taxpayer’s money spent on something which does not benefit them directly. Or perhaps they think the state should not support art, or … There are hundreds of against reasons arnt there? Alternatively, they may think the state should support the art forms of the young and brown. Or they may see a market failure which intervention could reduce, or …

I dont have a view because I dont know enough. But the 2005 Montana Book Award judges awarded the first prize in the Lifestyle & Contemporary Culture category to Gareth Shute’s Hip Hop Music in Aotearoa remarking it is ‘an important book because it brings to light a part of contemporary culture that for many New Zealanders is vital and, for many more, invisible.’

But even if we agree that the contemporary culture of the young and brown deserves support .is the spending effective in promoting that objective? One program clearly was not. Following a parliamentary debate about its waste, the government replaced the administering system to prevent a repeat of such inefficiency. However, it did not ban hip-hop from future funding, instead requiring a higher standard of care.

Ironically, parliament probably spent more debating that wasteful hip-hop program than the amount that was wasted. But parliament was not a waste. It was the use of parliamentary scrutiny to improve spending systems.

That is a major difference between the public and private sector. Public scrutiny reduces public sector waste. The boss of the Australian insurance firm, HIH, had gold taps in his executive washroom. Shareholders, workers, and customers only found out when the firm went bankrupt. During the short period when our accident compensation system was nationalised, HIH was one of private providers. You can be rootin’, tootin’ sure that parliamentary scrutiny ensures that the publicly owned Accident Compensation Commission does not have gold taps in its executive washrooms.

Much of the waste debate confuses objective and effectiveness. The reforms Scott refers to attempted to distinguish them. Those advocating reducing waste are confusing the two. They may be favouring changing objectives with greater private spending and less public spending. Or they may be ignoring the experience that Scott and Treasury, and promising what they cannot deliver?

Different values or claims as better managers? If the first, one hopes the options are clear to voters: if the second, politicians would do well to recall the American dictum that government waste is not a layer of fat to be sliced out. It is fat stippled through prime quality meat. Removing it damages the meat.