Why do governments find it so hard to control public expenditure?
Since the 1970's rising public expenditure has become a politically salient issue, with
the focus being on the difficulties experienced in trying to control it. In order to
answer a question concerning why governments find it hard to control public expenditure
it is first necessary to look at the reasons for the growth in public spending. There
are three approaches which attempt to give reasons for growing public expenditure which I
intend to scrutinise, these are, the societal system approach, the political system
approach and the governmental system approach. An evaluation of these approaches should
in turn shed light as to why governments find rising public expenditure hard to control.
Following this approach which gives a wide outlook on the problems facing governments in
controlling public expenditure, I will look at the post 1979 conservative government as
it in particular targeted controlling expenditure upon taking office.
Under the societal system approach one reason why a growth in public spending can be
seen to have occurred is due to Wagner's 'law of increasing state activity.' Wagner's
claim is that as per capita real income increases in particular nations, they will spend
a higher proportion of national product through government. As Wagner's reasons for
increased public expenditure tend to be centralised around industrialisation and its
associated effects it is not surprising to find that he thought the density of urban
living would increase social frictions to such an extent that the government would be
called in to handle it. That is to say, urban living would result in the need for
enhanced police protection and other forms of government regulation. Wagner also
believed that with growing industry certain investments would require so much capital
that the state would have to provide it. He thought there would also be public goods
that may not be in the interests of an entrepreneur to provide.
There are counter arguments to Wagner's suggestions, the first of these is that it could
be argued that increased density would provide opportunities for economies of scale.
Thus, the proximity of people to one another could result in networks of personal
support, lessening the need for public services. Secondly, contrary to Wagner's
arguments for public good provision by the state, it is possible to show other countries
that either do without it, or provide for user charges. This shifts the burden from
general revenues to those who benefit most directly.
Another reason for rising government expenditure under the societal system approach is
expressed via Tarschy's 'demonstration effect.' He suggests that the coming of
television "has led to increased awareness of the standard of living enjoyed by other
segments in society and even in other parts of the world. As a consequence, expectations
and pretensions mount, and people get increasingly sensitive to, injustices in the
distribution of public goods." But, if people become aware of goods they would like,
then why don't they work harder.
Peacock and Wiseman (1961) have suggested an alternative hypothesis known as the
'displacement effect', in which they believe public expenditure is limited by available
revenues. They suggest that we have seen increases in revenue occurring because after
the two world wars the level of taxation, although falling down from the enormously high
levels in wartime, did not recede back to the old level. Thus their hypothesis is that
major crises expand the public tolerance for increased levels of taxation. An argument
against this hypothesis is that why did expenditure continue to rise in the 1960's when
there was no displacement effect.
Another attempt at explaining rising public expenditure occurs under the political
system approach which proposes that pressures from within the political system itself is
responsible. Anthony Downs suggests that public spending should be seen as a function of
party competition, in which each party pursues policies it thinks the public wants. The
government will seek to set spending and tax levels at a point which will give them the
greatest support. They will therefore attempt to maximise the visible effects of
spending and try to disguise the costs of taxation to the public. According to Anthony
Downs this will result in the size of a governments budget being less than optimal. "In
so far as taxation can be concealed from the electorate, the government budget will tend
to be greater than the correct one. Voters will underestimate the costs they are paying
for special benefits received and parties will build this bias into their budget." The
problem with this approach is that although it is useful in explaining the way in which
government raises and spends money it isn't very helpful in explaining the growth in
expenditure.
There is also the party ideologies influence to consider in this approach, in that under
a socialist government we would expect to see greater public expenditure. This is not
always the case though as according to Wildavsky "non-socialist, liberal, Catholic or
conservative parties when they are in power, often spend proportionately as much (or
more) as do avowed socialists" The reason that a fall in state spending does not occur
according to Wildavsky is that non-socialist parties will not substantially reduce the
level of spending they inherit. It appears that there exists a consensus between the
parties in that there will not be expenditure cuts below existing levels.
As well as ideology, structure of the state can also be examined to determine if there
is any relationship between centralisation, decentralisation and state spending. The
outcomes may go either way as although centralised states may spend less per capita
because they are better able to exert control from the top, it could also be argued that
because the cost of spending programmes is diffused over the largest number of taxpayers,
none has sufficient interest in reducing expenditure to lower total costs. Less
centralised states on the other hand might spend more because there are so many more
spending spigots to turn on, or they may spend less per capita because the multiplicity
of local governments makes the connection closer between taxing and spending. Wildavsky
argues that it is within centralised states that we see higher public expenditure, which
may be because all highly centralised governments are big on social service spending.
The governmental system approach can be seen to try and explain growth in public
spending through two models. The first of these is the rational model in which
governments will set out its goals and values and what policies it will use to achieve
them, such as cost-benefit analysis, expectations, etc. But the problem with this view
is that the theory is not according to reality. Firstly, it is not feasible to list all
government options, secondly, no informational techniques are available to work out the
cost-benefit analysis of every decision, and finally there is the assumption that one
group of people have all the necessary techniques, skills and information to make the
decisions, and this is simply not true. It would appear that the rational model is
established on an irrational basis as it contains subjective values.
The second model which attempts to explain growth in expenditure under the governmental
system approach is the budgetary incrementalism model. This model suggest that the
largest determining factor of the size and content of this years budget is last years
budget. This is supported by Wilensky as he says "precedent is the major determinant of
who gets what the government has to give, and how much goes to the programme or agency
depends on what it got last time around" Two factors further encourage this model, the
first being that the magnitude of the process (40%-45% of GDP is public expenditure)
would imply that there is not the time or money to assess costs, and so a government will
look to the margins and leave the rest unchanged. Secondly, there is the assumption that
decisions are made sequentially and so the outcome depends on the order that decisions
are taken. The budget can therefore be seen to be like an iceberg, with by far the
largest part of it being below the surface, outside the control of anyone.
For the three approaches that attempt to explain the growth in expenditure it is
possible to see some evidence as to why governments may find it difficult to control
public expenditure even though there exists arguments against some of these approaches.
The most prominent indications being industrialisation under the societal system
approach, party competition and state structure in the political system approach and
incrementalism within the governmental system approach. Yet these theories just present
a widespread outlook and so I now turn my attention to the post 1979 Thatcher
administration to see the problems it faced in controlling public expenditure upon taking
office.
The conservative administration that came to power in 1979 believed that public spending
absorbed too great a share of national resources. Its view was that over the years
public spending had been increased on assumptions about economic growth which were not
achieved, the inevitable result being a growing burden of taxes and borrowing. If the
conservative government were to control public expenditure it could use three main
options available to it. The first of these was off loading to the private sector, the
second being to contain expenditure on the programmes that are retained, and thirdly
reducing the costs of running public services through greater efficiency.
At first off loading appears to be a healthy option for the government as in 1979 only a
small proportion of claims on the public purse could be attributed to the provision of
services which the private sector could not profitably supply; these being defence and
law and order which accounted for 14 per cent of total public spending. Thus around 75
per cent of all public spending goes on services or systems of income support which
private markets can provide. As such, education and health which constituted 26 per cent
of total spending did not count as public goods as markets can and do supply them were
the demand exists. This was not a popular view in the UK as since the second world war
there had been an assumption that these services should be available free, and the
criterion of whether people used them should be need, and not ability to pay. This was
also true of social security payments which in 1979 accounted for a further 24 per cent
of expenditure; this now means that around three quarters of public expenditure is
accountable for.
This structure of public spending in 1979 raises two important points, firstly the main
welfare services of health, education and social services had to be tackled if public
spending was to be reduced or merely contained, and secondly, there were few areas of
public spending which did not command support across the political spectrum. Therefore
public expenditure cuts by off loading could not be effective unless it undermined some
of the basic assumptions underlying the role of the public sector throughout the post-war
period.
If the government had succeeded in off-loading then the task of restricting the growth
of public spending would have been easy, but they off loaded little, leaving the
conservatives with the task of containing and wherever possible reducing expenditure on
existing programmes. This wasn't an impossible task as only three years earlier there
labour predecessors had succeeded in reducing expenditure, but this was only because it
was the price it had to pay for being bailed out of trouble by the IMF. Although this
cut in expenditure only lasted for one year as by 1978 public expenditure was rising
again. The conservative's faced two problems in containing expenditure, firstly, there
was demand factors to consider such as pressures from users and providers for better
services. Secondly, there was the supply factors such as changes in demography, as well
as new technology and the price of goods and labour, which all tend to raise the costs of
the services to be provided.
For the demand factors a reason why increased pressure from users would have occurred is
because the major services of health, education and income support are all 'superior
goods'; that is, as incomes grow, people tend to want more of them. Yet in most of the
public sector the pressure for more spending comes from those who provide the services,
from the government departments and their ministers who sponsor them. It is in the
interest of ministers to spend more rather than less as their political success tends to
be identified with the new programmes they introduce.
In terms of the supply factors which present difficulties for containing expenditure
there is the fact that during the 1980's changes occurred in the structure of the
population which added to the pressure for more spending. For example the population was
aging, and the number of young people entering the labour market rose at a time of record
unemployment so the government was more or less compelled to mount programmes designed to
occupy them. Changes in technology also contributed to cost increases, for example, the
department of health plans that advances in medical techniques will add half a per cent a
year to the cost of running the service, and a similar process works in defence. There
are economic pressures too as most of the public sector services are labour intensive, so
that in areas like health care which involve face to face contact, there is little scope
for substituting capital for labour, which is the normal way of reducing costs in other
parts of the economy.
The arguments expressed above shoe that containment of public expenditure was also
subject to many problems for the conservative government, thus it had to turn to
efficiency drives to reduce the cost of running public services. When the conservatives
came to power in 1979 they put efficiency at the top of their priorities for the public
sector. In their 1981 white paper 'Efficiency in the Civil Service' it stated "the
government took office determined to improve the efficiency of the Civil Service, to
eliminate waste and to promote methods of administration which enable and encourage staff
to give, the best possible value to the taxpayer." Raising efficiency for the government
was therefore not only a manifesto commitment but also the only way in which the
otherwise incompatible objectives of cutting spending whilst preserving services could be
combined. If the government could get more out of the resources they had at their
disposal, then increasing pressures to spend could be made consistent with little or no
growth in spending.
Due to the nature of public services in the UK it remained that the only available
avenue open to the conservatives to control public expenditure was through greater
efficiency of public services. Yet there were still more obstacles to be faced in order
to achieve greater efficiency, the most prominent one being that those responsible for
running the public sector, from the ministers to the service providers, had little time
to denote to ensuring that the services they were responsible for were efficiently run.
Their priorities lay elsewhere, for ministers with devising policies and ensuring their
acceptance, whilst service providers were more concerned with the standard and scope of
the service they worked in rather than whether it was provided in the most economical
way. This problem of encouraging greater efficiency as well as the governments apparent
inability to contain expenditure or to off-load it, seem to me to illustrate the reasons
why governments find it so hard to control public expenditure.
Bibliography
A Harrison (1989) 'The Control of Public Expenditure 1979-89'
A Jordan & J Richardson (1987) 'British Politics and the Policy Process' ch. 9
L Pliatsky (1989) 'The Treasury Under Mrs Thatcher'
A Wildavsky (1985) 'The logic of public sector growth' in J- E Lane (ed) State and
Market
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