Lack of focus on value for money in government has high cost

Dr Bryce Wilkinson
The National Business Review
21 September, 2018

New Zealand is a high-tax country compared to prosperous non-European countries but much of the money appears ill spent.

One example of poor outcomes is government spending of about $130,000 to educate an average school pupil to age 15.

Yet 17% of them are failing to achieve basic numeracy and literacy. That cripples their life prospects. Why should taxpayers and parents have to accept that outcome?

Waste matters. With less waste governments could achieve better outcomes for New Zealanders, and/or householders could spend more of their own money through lower taxes. Only the most perverse would prefer government to be wasteful.

Overseas research provides different evidence of waste in the form of ineffectual spending. Reputable research organisations, including the OECD and the Fraser Institute, a Canadian think tank, have assessed wellbeing outcomes relative to spending across countries. The countries with the best outcomes relative to effort provide a benchmark for the rest.


Spending less to achieve more
One such OECD study indicated a benchmark performer could expect to achieve the same outcomes from school education as New Zealand while spending one-sixth less. Another OECD study indicated a benchmark performer could achieve much the same health outcomes for New Zealanders while spending 2.5% of GDP less on health annually.

A more recent 2013 study by the Fraser Institute compiled wellbeing scores for 33 member countries of the OECD using 19 indicators. Four were economic and two were health indicators. The other 13 measured different aspects of societal wellbeing. They included crime housing, inequality, pollution and self-assessed wellbeing.

New Zealand’s score was 5.5 out of 10. Thirteen of the 33 countries had a higher score, Australia’s was 6.1. Luxembourg was at the top with 7.5.

These wellbeing scores were compared with each country’s government spending ratio to GDP. South Korea was the best performer.

If New Zealand could perform as well, it might hope to spend one third less for the same 5.5 score. One third less represents a massive 13% of GDP, or $20,000 per household annually. That is twice what the average household spends on food.

This evidence of large-scale government waste in spending comes from a new report on wasteful government spending released this week by the New Zealand Initiative, Fit for Purpose? Are Kiwis getting the government they pay for?

The report considers such findings from international comparisons to be largely motivational. They identify countries that appear to be doing better. We should not be too proud to learn from them. But they do not show what New Zealand would need to change, or whether such changes are feasible.

Compelling direct evidence of waste is the inadequate focus of government agencies on outcomes relative to resources employed. NZ Productivity Commission reports have documented this neglect. Too often what could be measured is not measured and what is measured is neglected. What is not measured and is difficult to achieve is unlikely to be achieved.

The report also looks at evidence of the quality of laws and regulations in New Zealand. The number of parliamentary acts has increased 50-fold since 1908, and legislation has become much more complex. Back in 1908, there was nothing like today’s 796-page Resource Management Act. Today, we have a 3351-page Income Tax Act; in stark contrast, the Land and Income Assessment Act 1908 comprised only 39 pages.

New Zealand is far from alone in the growth of the regulatory state. Indeed, we commonly rank among the best today for the quality of our core institutions, laws and regulations. The World Bank ranked us first in the world for ease of doing business in 2018. We rank third in the world for economic freedom in the two most-cited global rankings.

It was not always so. New Zealand's rank was much lower before the economic reforms between 1984 and 1995.


Our weaknesses
The report identifies 20-30 areas of weakness in the World Bank’s indicators. Many are familiar. New Zealand ranks poorly for foreign investment regulations, infant mortality and housing costs. Perhaps less well known are poor ranks for the road toll, crime and aspects of our infrastructure. Aspects of our employment laws are restrictive. The regulatory costs of exporting and importing are also relatively high.

There was an unexpected and disappointing finding. Australia ranks well ahead of New Zealand for both ease of enforcing contracts and of resolving insolvency. Worse still, 53 countries were found to have higher-quality judicial processes than New Zealand.

Judicial quality is a core government responsibility. Weakness there weakens everything. The Ministry of Justice should tell the public why our judicial system compares so unfavourably.

These findings are relevant to the work of the government’s Tax Working Group, whose interim report was published yesterday, after this article went to press.

Why tax New Zealanders even more if much existing spending is so ineffectual, or worse?

Central government taxes rose more than four times faster than national income during the 20th century. New Zealanders are now highly taxed relative to income, both relative to the distant past and relative to the vast majority of people in relatively prosperous countries. Yet the government could be forgiven if it was feeling pressured to spend more and more without limit.

A much greater focus on value-for-money in spending is needed. That will only happen if the public debate shifts in that direction. This report is a contribution to that cause.

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