Downsizing government can boost development funds

Even before coping with unexpected disasters, governments rarely have enough funds for routine spending priorities. Especially before an election, it can feel politically undesirable to raise taxes or public-sector borrowing. What about cutbacks? British Chancellor Brown, for example, recently chose to cut over 80 000 civil service jobs and save the cash for funding health and education programmes.

A policy analysis report published by America's Cato Institute showed how to create annual budget savings of $300 billion (about R2.0 trillion). That sounds a lot but it's only 13% of a federal budget which spends 20% of US Gross Domestic Product (GDP). For comparison, this year SA central government plans to spend 27% of GDP, or R332 billion.

Governments usually spend under 5% of GDP providing 'core' defence, policing and justice services. That would be R61bn, or R1,355 per South African. For Americans it's a bit more – $500bn, or roughly R10,000 each. The rest of our government spending in 2003/4 is R261bn, or R5,800 each (around R36 000 per American). It's the democratic assumption that this is roughly what we-the-people want, but of course not all the money is entirely well spent!

If we scored the Cato goal and freed up 13% of budgeted government spending, R43 billion would become available for more important purposes. Such as? A splendid 14% rebate for all taxpayers to bring about a demand-led growth spurt? A year-long basic income grant of R80 a month to boost everyone's demand? More military hardware to deter invading enemies? More temporary-jobs-creating public works?

Well, we elect governments to make such decisions. Rather than counting chickens, how could we hatch them? In the Cato report, author Chris Edwards considers unneeded programmes and mismanagement including waste, fraud and abuse. He doesn't address the huge fiscal challenge of rising entitlement costs such as for pensions and healthcare.

US federal tentacles, Edwards suggests, are eightfold and start with the federal bureaucracy of nearly 2m civilian employees and 1.5m uniformed military. Then there are taxes and tax loopholes, and transfers and subsidies to individuals and businesses. There are grants to state and local governments – our provinces and municipalities. There are government purchases, and government corporations, and loans outstanding and guaranteed. Last but not least there are regulations – 75 000 new pages of them every year, costing the economy rather than government an estimated annual $860bn.

Thanks to government's extraordinary reach, an estimated 15m people outside the US civil service perform government-directed work. If the ratio is similar in SA, our 1m-plus civil servants are 'shadowed' by a private-sector workforce of over 7m people. That would represent a significant – if not major – proportion of formal-sector employment in slow-growing South Africa.

Edwards identifies five kinds of government problem. First is waste, by fraud and abuse, duplication, or programmes that are obsolete, mismanaged or ineffective. Then there's unjustified redistribution, and here he suggests that governments should only provide 'public goods' – items that are broadly beneficial and have benefits that outweigh their costs but are inadequately provided by the private sector (national defence, for example). Then harm, from programmes that actively damage the economy, individual freedom, society or the environment. Then state and local (SA's provincial, municipal and community) functions that central government ought not to perform. Finally there are commercial activities that can be carried out by private firms in competitive markets.

He offers four possible budget-saving solutions to these five kinds of problem. Wasteful government activities can be tackled in any of these four ways – restructured, stopped, devolved, or privatised. Simply stop redistributing unjustifiably or doing harm. Stop or devolve activities properly done at state or local level. Stop or privatise commercial activities.

The Bush administration found about half of all federal employees performing tasks also performed by private businesses in the marketplace, and thus not 'inherently governmental'. No doubt the proportion is still higher in our relatively much larger and more centralised government sector.

But how realistic is it to wish for downsized government in a 'developmental' state? In early May on the ANC Today website, President Mbeki explained 'The tasks ahead of us – the political, economic, social and international tasks of the National Democratic Revolution.' He described the three long-standing strategic NDR tasks as '1) defeat apartheid, transfer power, defend and consolidate political victory; 2) eradicate the centuries-old legacy of colonialism and apartheid in all areas of human activity; and 3) the third will be the achievement of the goal of a better life for all ... on the basis of the successes we would have scored as we pursue the second strategic goal of the NDR.' (my italics)

This makes government policy clear – because redistribution is far from complete, the pursuit of general economic growth is not yet a priority. With so much transformation still to do, it's unrealistic to hope the SA government will tax and spend less in the short term. But downsizing problematic government functions can certainly yield plenty of funds for more important public purposes.

Downsizing to divert funds elsewhere may not intend to boost growth and prosperity, but it may happen anyway. Wasteful and harmful activities stopped, and commercial activities privatised, will unchain and stimulate more productive private enterprise. Though it dispirits wealth-creators and creates dependents, greater tax redistribution may at least reduce crime to some extent. Devolution offers at least a possibility of greater official accountability to voter-consumers.

In principle, big government can restructure to 'first do no harm' like a health practitioner. Re-prioritising from creating problems towards providing cost-effective 'public goods' without reducing taxation might just boost growth. The Bush administration or its successor may be driven to do so by a combination of war-deficit necessity and libertarian principle. Driven by neither, the SA administration could also use a downsized-funding shot in the arm.

Author: The Late Dr Jim Harris was a freelance researcher and writer. This article may be republished without prior consent but with acknowledgement to the author. The views expressed in the article are the author’s and are not necessarily shared by the members of the Free Market Foundation.

FMF Feature Article/ 31 August 2004 – Policy Bulletin/ 26 January 2010