The costly bureaucracy

The Herald and the Dom Post report on a paper by National Bank chief economist Cameron Bagrie. The paper looks at how much spending actually goes into back-office costs rather than front-line services.

In a paper released yesterday Bagrie plots the changing – and by implication deteriorating – mix of over the past 10 years.

One measure distinguishes departments’ front-line spending on things such as paying nurses, and policemen from back-office functions such as administering, approving and monitoring things.

“Growth in total departmental outputs has averaged close to 7 per cent a year since 1997, while front-line spending has averaged 5 per cent a year,” Bagrie said.

“If the ratio of back-office to front-line spending had remained constant there would have been close to $1 billion free for other initiatives in 2007.”

Certain other blogs will claim that $1 billion is only $250 per person which is only $5 a week which is only $0.70c a a day and laugh at this being any evidence of anything.

Me, I think a billion here and a billion there does matter.

For example, spending on welfare benefits had increased by an average of 3 per cent a year, but back-office departmental spending by 7.5 per cent.

It puzzles me that fewer people on benefits means it costs more not less to administer them.

There is some good news:

But another indicator, which distinguishes “hand-out” spending such as welfare payments from “hand-up” spending like and initiatives, showed relatively more money going to the latter.

“That’s encouraging.” he said. “However it is not so rosy if we exclude the unemployment benefit, which has fallen dramatically as a consequence of an extended period of economic expansion.”

Hands-up is preferable indeed.

Bagrie stressed that the issue he was raising related to the mix of Government spending, not the level.

He is agonistic about what an optimal level of relative to the size of the economy would be. The international evidence was inconclusive on that, he said.

Here I disagree. I am very unagnostic, and think there is considerable evidence linking higher econoomic growth to smaller Government. Instead of arguing about one or two countries over one or two years, I prefer the studies of all OECD countries over 30 – 40 years and the correlation is strong.

On the mix of Government spending, the Treasury had been “strangely silent” for years, he said. “They have a responsibility not just to their minister but to the wider taxpayer.”

Alas the Treasury of old is no longer.

Finally Bagrie asks:

“Do we really need 41 Government departments and 65 Crown entities, not to mention the 21 district health boards and nine Crown research institutes, for a population of four million?”

This is an area I am especially interested in. I think the trend (started by National actually) into smaller agencies has produced far too many, and that we should be looking at amalgamating like agencies together.

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