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.
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