Revamp public spending

Revamp public spending

The strikes in Greece against the government’s austerity package must worry the leaders of any country running big budget deficits, including India. After all, the level of debt is so high that Athens’ attempts are not enough to redeem Greece any time soon.

The good news, though, after finance minister Pranab Mukherjee’s reform-light budget last week is that governments can cut deficits without civil unrest and without losing anything that voters really value. But, over the longer term, sound finances can only be achieved through a reform strategy, not a cuts strategy—as Canada has shown.

The huge rises in taxation in the US and Europe in the last decade bought plenty of intrusive new agencies, more expensive doctors and teachers, and superlative pay and pensions for growing number of bureaucrats. But taxpayers don’t believe they have bought better services. And entrepreneurs complain that the rise in regulation and bureaucracy prevents them from generating the growth needed to save faltering economies.

Yet talk of spending cuts always alarms voters. Even in Britain, with a deficit nearing 15% of gross domestic product (GDP), neither Gordon Brown’s Labour government nor David Cameron’s Conservative opposition are willing to talk budget cuts in advance of the May election. After a 10-year public spending spree, Britain’s debt was shocking even before the financial crisis. The last time Britain was so far in the red was when it was fighting off Napoleon and Hitler.

Governments with debt problems might buy themselves a little time with across-the-board budget and salary freezes. But that is no long-term solution: It just breeds resentment among public workers, many of whom are low-paid and would be hit disproportionately.

Canada found this when trying to cut its deficit in the late 1980s. There were strikes and plummeting morale. Important services were cut along with marginal ones. Efficiency drives had little impact.

The incoming Liberal Party government of 1993 faced a huge budget problem but managed to cut the deficit from 9.1% of GDP to zero in just five years by working out how to run government a lot cheaper—and without increasing taxes.

The Canadians’ first move was to appoint a minister for public service renewal—a single figure with the authority to drive change and make sure all ministers did their bit. They put nothing off limits, not even healthcare. There were no spending targets because they knew that departments simply spend up to such limits. But there was a complete review of all government activity.

Ministers had to define what their department was for. Did that really need civil servants, or could it be done better by private bodies or by the public itself? With a reform rather than a finance minister in charge, everyone bought into this as a complete rethink of how the government served citizens—not just an exercise in penny-pinching.

Canada recognized that some public services remained vital, while others could be completely redesigned or even eliminated. The end result was small cuts (or even increases) in some departments but large savings in others—massive cuts in transport and farm subsidies, but rises in benefits for the elderly. Within three years, the deficit was eliminated and the debt falling. Within five years, the civil service had shrunk by 23% without strikes or unrest.

With so many governments now so deep in debt, Canada’s strategy seems the right model for India, whose public debt is at 80% of GDP.

Appoint a senior minister to conduct a complete review of what government does, what it needs to do, how to do that better, and what to leave to other people. Rethink government and the savings will follow.

Eamonn Butler is director of the Adam Smith Institute, London, and author of The Alternative Manifesto (2010).

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