The March 19 issue of The Economist included a special report on The Future of the State. In an excellent series of articles, the special report explains why the continuing growth of government is no longer sustainable, especially in the more advanced economies with aging populations like the US and Western Europe. It highlights what some governments are doing to address the problem, especially Singapore and Britain. Finally, the report offers a set of recommendations that governments might follow if they want to get a handle on the extremely complex and challenging problem of reforming the state.
“How to slim the state will become the great political issue of our times,” is the byline of its introductory article, Taming Leviathan. “The state has kept on grabbing an ever larger share of the economy in the rich world for a century, and the state’s regulatory sweep has increased as well.” The report includes a chart showing that the average government spending as a percentage of GDP in thirteen rich world countries went from 10.4% in 1870, to 28.8% in 1960, and 47.7% in 2009.
“ . . . the forces driving this growth are powerful,” it writes, “but so are the reasons why it needs to be halted . . . there are pragmatic grounds now for politicians of all sorts to make the state more productive. With ageing populations to care for, many rich-world governments are on course for bankruptcy - unless they raise taxes to levels that would wreck their economies.”
Why has government grown so much in these rich nations over the past century? “Because, despite all that rhetoric from the tea-partiers, big government is not just the fault of self-interested bureaucrats and leftist politicians. Conservative voters, even if they don’t like taxes, have kept on demanding that the state does more. Just as the left has built hospitals, announced endless programmes to help the poor and indulged the teachers’ unions, the right has built prisons, announced wars on drugs and terror, and indulged generals, farmers and policemen.”
“First, productivity in the state sector, especially in fields like education and health, has lagged behind the private sector. And second, there has been a huge increase in social transfers, especially benefits for the middle classes and the elderly. To lose weight, governments have to do two things: learn how to do more with less, which means modernising the state, and cut back on what they offer, which among other things means tackling the social transfers. Both are inevitable, but the first offers the best chance of immediate gains.”
Tackling the first structural issue might simply amounts to good management. It means that the public sector should embrace many of the technologies and organizational practices that have been successfully applied in the private sector over the past twenty years.
“Merely bringing the useless bits of the public sector up to something close to average would save a fortune and improve services dramatically. And there are also common themes that emerge time and again: pay good staff well; make performance transparent; simplify taxes; and move towards a small core civil service with a lot of competing suppliers for services.”
These are the themes that Singapore has followed, which most everyone agrees has one of the most productive public sectors in the world. “Singapore provides better schools and hospitals and safer streets than most Western countries - and all with a state that consumes only 19% of GDP.”
How do they do it? First, is the quality of its civil service. The Singapore government attracts top talent. It is run as a meritocracy, - much as you would expect in a well managed company, - paying high salaries to those who do well and pushing out those who don’t make the grade.
Next, it has worked hard to build an environment to attract businesses from all over the world. “The central message has remained much the same for decades: come to us and you will get excellent infrastructure, a well-educated workforce, open trade routes, the rule of law and low taxes. In other words, Singapore’s competitive advantage has been good, cheap government. It has worked hard to keep its state small.”
One way Singapore has kept its government small and its taxes low is by keeping down social transfers, especially to the middle class. The government provides a small safety net to cover the very poor and the very sick. It also provides some basic services like a good education. Otherwise, people are expected to look after themselves and pay for government services, including making co-payments for health care and plan for their retirement through savings.
Granting that it is easier to govern 5 million people in a small island than over 300 million Americans in a landmass spanning over four time zones, there is quite a bit one can learn from Singapore’s model, at least at the level of cities and metropolitan areas, which are responsible for many public services including education, police and transportation. Given the rapid urbanization taking place around the world, smart government could be one of the most important elements of a smarter city.
Summarizing its recommendations for structural changes in the management of government, The Economist writes:
“Purely by copying what other countries (or bits of their own system) do well, governments could save a huge amount of money. The path forward is pretty clear - towards a small central state buying in services from a variety of different providers. Technology could speed things up. A huge quantity of information about just how poorly bits of government are doing is becoming available - and, thanks to Facebook and other new media, shareable. Transparency will also affect demand. Too many voters are “Californians”: they think they can enjoy ever more services without paying for them. When they see the true cost of government, they may change their minds.”
The second major structural change involves cutting back the services government offers and pays for, especially benefits for the middle class and the elderly. Limiting benefits will be much more difficult “ . . . especially the universal benefits enjoyed by most Western voters. Social transfers have accounted for a large part of the growth in the state: they also explain why even a well-run version of Britain’s all-you-can-eat “buffet” state would be twice the size of Singapore’s. Unless Western governments start to reform entitlements, the state will swell again in line with their ageing populations.”
“Some universal benefits can be trimmed across the board. State pension ages, for instance, are on the rise. But governments also need to start redirecting social programmes at the truly needy.”
“Persuading middle-class voters to give up their perks will be extremely hard. One possible avenue is to hand them greater control over their own benefits, perhaps by switching pay-as-you-go systems to individual savings accounts . . . That has not had much success yet - in part because most people, especially the young, are in the dark about how much the current system is really costing them.”
As The Economist observes, we have no choice but to address the major structural issues that have been driving the growth of the state. Governments cannot continue to grow. Something must be done, - whether one embraces the recommendations offered by The Economist or comes up with a different set of actions. Any changes will likely be accompanied by considerable turmoil and pain.
Serious discussions on how to best reform government have started around the world. I truly hope that different states, regions and cities will find innovative approaches to make governments significantly more productive and to make it possible for their citizens to have access to high quality services at affordable costs. While there will be lots of opinions, the one thing we can probably all agree on is that these are truly some of our toughest and most important challenges in the years ahead.