Monday, 18 May 2009

Expanding The Public Sector

All across the world Governments are rapidly expanding their Public Sectors in the name of ‘Fiscal Stimulus’. Some of this expansion is through ‘automatic stabilisers’ (falling tax receipts and rising welfare payments as the economy shrinks), and some of this expansion is through ‘discretionary measures’ (roads, infrastructure, selective tax cuts, and so on). The key difference between the North American economies and the European economies is that the North American economies have a predisposition for discretionary measures whilst the European economies have a predisposition for automatic stabilisers.

Some figures might help to show the case. The IMF estimates the discretionary measures of the following nations - as a percentage of GDP - to be: USA 1.6%, Germany 1.1%, France 0.4%, UK 0.5%. On this basis, Germany is the only European nation that seems to be making an attempt at stimulating demand. However, when we add in the value of the automatic stabilisers to the discretionary measures – again, according to the IMF and as a percentage of GDP – the situation takes on a different colour: USA 3.2%, Germany 2.7%, France 2.8%. UK 3.0%. It would appear that there has been a more balanced approach to the fiscal stimulus when the automatic stabilisers are included with the discretionary measures.

Generally speaking, the fiscal stimulus has been financed by debt. The PSBR, right across the global economy, is set to expand well into the next decade. It is this expansion that brings to our attention, as futurists, the long term impact of an expanded Public Sector. Automatic stabilisers are just that – automatic. As trading conditions improve, so tax receipts will increase and welfare payments fall, thus easing the pressure on the PSBR. The discretionary measures are a different case all together.

The experience of Post War economies suggests that discretionary measures are quite asymmetrical. The political process finds it easy to vote them in, but very difficult to vote them out. This is, in part, because the nature of the expenditures changes. They normally start out as a single, discrete, expense item; but generally turn into a recurring continuous expense item. Roads and bridges invariably need upkeep, maintenance, and replacement. Hospitals need staff and equipment, and so on. Scaling back discretionary measures has proven to be very difficult in the past, and there is no reason to suggest that it would be any less so in the future, which implies that an expanded Public Sector should be with us well into the next decade.

If we think in terms of institutional degenerates, then it seems quite obvious that the Private Sector degenerates into greed and excess. The Public Sector usually degenerates into waste and inefficiency. Waste and inefficiency can be quite well hidden. For example, a recent case of a school tackling counterfeit £1 coins came to our attention. A letter was sent to the school parents (see letter) informing them of the situation and outlining the remedial action to be taken. On the face of it, this is a good example of a public agency acting to protect the public purse. However, a different picture emerges on closer inspection. We estimate the staff time to implement the policy, including on-costs, to be just over £6,000 in a two week period.

Spending over £6,000 to save £100 is exactly the type of hidden inefficiencies that are likely to arise as the Public Sector expands. These will expand both in terms of amount and scope across all of the economies in the G20. If the Public Sector does continue to expand well into the next decade, and if it is difficult to scale back the discretionary measures, then a relatively large amount of waste and inefficiency will have accumulated by the year 2020. This being so, the political conditions would be right for the next Thatcher to attempt to eliminate that waste and to prune back the Public Sector. The pendulum will swing back again with the contraction of the Public Sector and the deregulation of the economy.

Much of long term futuring is looking to find those swings in the pendulum. Sometimes they appear just plain obvious.

© The European Futures Observatory 2009


Anonymous said...


Your analyses while very insightful leaves one wondering whether the world needs a fundamental rethink of its mechanisms for recovering from recessionary times.

I believe firmly that only governmental intervention can help stabilize economies that are driven into recessions. That is the first part.

The question of 'HOW' should governments intervene is indeed a very big question. The answer that comes to mind is 'Governments should intervene in ways that will work!' - meaning that the effectiveness of the intervention ought to be measured in terms of the pace of job creation, the pace of recovery in various sectors, levels of consumer confidence and such.

The long term effectiveness of fiscal stimuli should, according to me, be a subject of study by scholars, academics and economists since the level of fiscal stimuli we see today is unprecedented in history. There is no doubt in my mind though that governments need to set up such study groups to monitor the long term effectiveness of the stimulus packages that are being proposed.

- Shekhar Scindia

Stephen Aguilar-Millan said...

Dear Shektar,

I agree with you that the fidcal stimuli are the tonic that is needed right now. I think that we also need to be mindful of what we are buying because the political process seems very poor at delivering a fiscal tightening when it is needed (some may argue that Bush ought to have increased taxes in the US between 2004 and 2007 to mop up the liquidity being pumped into the US by East Asia).

In this case, I am probably arguing the 'European' position for automatic stabilisers rather than the use of discretionary measures on the basis that the automatic stabilisers do have this symmetry.

With best wishes,


Anonymous said...

Dear Stephen,

The 'automatic stabilisers' that you refer to bear an inherent 'do nothing' approach on the part of governments. Government tax receipts decline, increased welfare payments add to the loss of revenue further depleting government budget deficits. They however do little to stimulate demand, create jobs and reverse the downward spiral that is characteristic of recessions.

Discretionary measures on the other hand are very proactive and forceful in reversing the downward spiral. They will however leave bigger holes in government budgets than would be caused solely by automatic stabilisers.

It is clear that all countries that are delivering huge fiscal stimuli to their economies are taking on huge economic risk which will have to be carefully managed for several years if not decades into the future.


Shekhar Scindia

Stephen Aguilar-Millan said...

Dear Shektar,

I am not sure that I entirely agree with the view that the increased welfare payments of the automatic stabilisers do little to stimulate demand.

These payments are generally paid to the unemployed (almost by definition), who have a relatively high marginal propensity to consume (as opposed to save). To this extent, demand is stimulated higher than it otherwise would have been.

With best wishes,