Restoring fiscal discipline – and trust

Dr Eric Crampton
21 May, 2024

American libertarian author and satirist P.J. O’Rourke used to joke that “Giving money and power to government is like giving whiskey and car keys to teenage boys.”

The problem really is one of trust. At least when O’Rourke was writing, the average American teenaged boy couldn’t be trusted with whiskey and car keys. But there would always be some teenagers who could be trusted if left home alone for the weekend with an unlocked liquor cabinet and with a car in the garage. Trust can be earned.

And perhaps surprisingly, New Zealand’s government has ranked among the world’s more trustworthy. At least according to a study published this past week in the journal Public Choice.

The study by António Afonso, João Tovar Jalles and Ana Venâncio, “A tale of government spending efficiency and trust in the state”, shows that people put more trust in governments that are more efficient in terms of government spending. And New Zealand ranked firmly among the top tier for value from public expenditure – at least in 2018.

The results matter when thinking about the path back to fiscal discipline. It isn’t just about good public management. It’s also about rebuilding the trust that any government would need for dealing with future crises.

Afonso and coauthors looked back over prior scholarship on trust in governments and inferred that much depended on whether governments delivered value-for-money in spending. The team set out to test the relationship more directly.

They began by building measures of public sector performance in domains like administration, education, health, infrastructure, and economic performance across 36 OECD countries over a period from 2006 through 2019.

Different countries choose different levels of government expenditure. Countries that deliver the best value-for-money at those different levels of expenditure are at what economists will call the frontier. If you are inside the frontier, at least one other country’s government is able to deliver better value for the same amount of money that your government spends. If you are at the frontier, further improvements really are world-beating.

Across three different ways of cutting the numbers, New Zealand was on the frontier in 2018, but only in 2018. Ireland touched the frontier in 2015 and 2019. Australia was on the frontier from 2009-2011, in 2013, and in 2019. Chile was on the frontier from 2007 through 2016 and again in 2019; South Korea from 2006 through 2018. And Switzerland was as well for eight years over the period.

The authors then compared public sector efficiency with annual survey measures of trust in the public sector, statistically controlling for a host of other factors expected to affect trust. Across several ways of slicing the data, they found that stronger value-for-money in public spending contributes to increased public trust in government.

As they put it, “the more efficient a government is in managing its expenditure, the higher the level of trust it will gather from voters and citizens.”

With that in mind, it’s worth looking back at 2018, and forward from there. The results matter for Budget 2024 and beyond.

In the year ended June 2018, core government expenditure amounted to $27.30 of every $100 in overall economic activity. Reasonably strong economic growth combined with discipline in government spending after the Christchurch earthquakes meant that core government spending was a smaller share of a larger economy.

Government spending was a larger share of economic activity in the years before 2018, and in the years after.

The National-led government’s investment approach had emphasised strong value-for-money in public spending. It was not averse to spending public dollars, but it wanted good evidence that that spending would improve outcomes.

Strong fiscal discipline and good public sector outcomes built trust in government and brought New Zealand to the international frontier in 2018.

Strong and deserved trust in government meant strong cross-party consensus that the government could be trusted with the funding needed to deal with Covid.

But Labour’s post-Covid budgets then abandoned the discipline that gave rise to public trust in the first place.

The problem wasn’t just that spending rose to a forecast $33.40 of every $100 in overall economic activity forecast for 2024 – just slightly below the Covid-era peak in 2022 of $34.60 of every $100.

The problem rather was that the very substantial increase in the size of the state was undisciplined.

After the Great Financial Crisis and Christchurch earthquakes, core government spending charted a steady track to pre-crisis proportions of economic activity. That made it easier to trust that New Zealand’s government was trustworthy in the crisis.

But over the period from Covid lockdowns through Budget 2023, Ministries were given large increases in funding with little accountability for outcomes. Covid was handled, but debt authorised for the necessary public health and economic response to Covid wound up funding all manner of other projects as well. The Auditor General’s reports on that spending are concerning. And the incoming Coalition government was left with a structural deficit to unwind.

It was as though we’d left the teenager at home with the unlocked liquor cabinet, car in the garage, and a to-do list – then came home to find the to-do list largely completed, but the liquor cabinet empty and doughnut tyre tracks on the front lawn.

I have worried that the Covid response and the sometimes-hysterical reaction to post-crisis retrenchment will make it harder to trust government with the flexibility that could be needed for future crises.

The study released last week suggests a broader worry. Without an appropriate focus on value for public spending, trust in government more generally is likely to erode.

Perhaps best to set policy so it looks less like the butt of a P.J. O’Rourke joke.

To read the full article on the Newsroom website, click here.

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