Friday, June 12, 2009

Cuts - Get Used to It

The next set of political challenges will be simple: which political party can reduce public expenditure and reduce the role of government while doing the least damage to education, health and services to the elderly.

The reason is simple: all national governments in the developed world are now burdened with debt as a result of their “stimulus” spending and years of expenditure growth. Canada’s deficit, for example, is currently estimated at between $50billion and $100billion. Britain’s debt, by 2011, will be 100% of GDP. The US debt is so large as to threaten the stability of the world’s financial system - its around $10 trillion and growing by billions a day. There is a danger that the agencies which rate the financial stability of nations – the bond rating agencies – may start to downgrade several countries, including Britain and the US.

In Britain, the “cuts” debate has already started. The embattled Gordon Brown, giving a new lease on power due to a spineless Labour party, is talking about his strategy of spending more and contrasting this with the Conservative party’s strategy of cutting public spending. Yet his own 2009 budget promises cuts of substance, including almost immediate cuts in real terms to health care, starting in 2011. Independent financial analysis suggests that the cuts will be in the order of 5% each year for six to eight years.

Obama, while campaigning for increased public spending on health care, is also talking about increasing efficiency and eliminating waste (terms that are a code for cuts) so as to halve the deficit by the end of his first term.

The real challenge here is only partly about finances. More importantly, it is about the place of government in twenty first century society. The key question, in each area of life, is do we need to be doing this work at all? If we do need to do it, then we should ask can it be done as well (or better) by someone other than government at a similar or lower cost? If the answer is yes, then change is needed. If the answer is no, the next question is how can government do this outstandingly well at the least lifetime cost of service?

If we are not careful, the debate about cuts will get in the way of the debate about the appropriate role of government. In Canada, we see this most in the debate about healthcare. The “friends of medicare”, for example, do not accept that the current Canadian system is unsustainable and unaffordable, despite strong evidence to the contrary. They want governments to spend more, not less and they see no role of substance for the private sector. For them, this is not a matter for debate.
Climate change campaigners also see regulation and government enforcement, including significant and substantial subsidies and increased public presence in many areas of our lives, as absolute pre-requisites for the shift to a low carbon economy which, they insist (despite scientific evidence to the contrary), will “combat climate change”. More spending. Anyone who does not support this view is a “denier” who puts the planet in peril.

Education is another area which is seen by many as “hallowed” ground, despite evidence that spending more makes little difference to pupil performance and has no impact on productivity.

What is needed are informed options which are independent of political parties and based on best practice analysis from around the world. Put the options on the table, cost them and provide a basis for evaluating them and then let us begin the debate. How political parties chose to mix and max the options will tell us a lot about their beliefs, values and strategy.

We should also not believe any politician who suggests that government spending will not be cut, even for health or education. Look at real spending, not forecast figures, and watch them stabilize and shrink in real terms. Its going to get tough. Get used to it.

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