Waste and fat guaranteed when governments spend our money

POLITICIANS say the most outlandish things sometimes. Take federal Health Minister Tanya Plibersek who has a gift for sounding wonderfully articulate and perfectly measured even when saying the most ridiculous things.

Speaking on ABC1's Insiders program on Sunday, Plibersek said: "I will look at every line in our (health) budget and make sure that there is no waste and no fat". Either the Health Minister believes in Utopia and a federal Fairy Godmother or she is taking voters for fools. Either way, it's surely time for a refresher course in first principles when it comes to the fate of taxpayer dollars.

Unless some basic principles are better understood by the community, governments at all levels and regardless of political stripes will not be able to take the sorts of decisions needed to avoid budget blowouts. Making funding cuts to government departments is never politically easy. Just look at the hysterical overreaction and emotional grandstanding to funding cuts announced in Queensland and NSW in recent days. The immediate assumption is that front-line services are being cut. Voters will lose out. Hospital patients will be at risk. Schoolchildren will suffer. Life will never be the same again. And all this, says Treasurer and Bruce Springsteen tragic Wayne Swan, is a taste of the "wrecking ball" that is Tony Abbott.

Making tough cuts to a government's bottom line is so politically fraught that Timid Ted Baillieu, the Victorian Premier, is sitting on a secret audit commission report that suggests budget savings more than twice the size planned by his Victorian Coalition government. The audit is not advocating radical stuff. Instead, the report suggests sensible measures such as more partnerships between public and private hospitals. But it's too much for a timorous politician like Ted. So the audit report, revealed by The Australian last month, has not been released to Victorian voters for consideration.

The truth is that responsible politicians must make cuts or else budgets will blow out further, state debt will climb, repaying the debt will become more expensive as state credit ratings fall and here's the real fiscal crunch -- future taxpayers (our children) will end up footing a much bigger bill. So why don't politicians make their jobs easier by levelling with voters now, instead of lying to us about scouring budget lines to make sure "there is no waste and there is no fat".

Politicians could, for example, fess up to the unavoidable, indisputable problems of waste and fat when governments spend our money. Remember the four ways of spending money? If this sounds like the beginning of a joke by American political satirist P. J. O'Rourke, it is. Except that it's no joke and O'Rourke is simply echoing the four basic rules set down by Nobel Prize-winning economist Milton Friedman. Rules that we often forget at our peril.

First, I can spend my own money on myself in which case I really take note of how much I spend and what exactly I spend the money on. Second, I can spend my money on someone else. I could buy you a birthday present in which case I really care how much I spend but what I buy is less important. Third, I can spend someone else's money on myself. Here I will splash out on something grand that I really want but I don't care so much what it costs. After all, it's not my money. Last, I can spend other people's money on other people in which case, if I am honest, I am less concerned what I spend the money on and the amount I spend.

And that is government, said Friedman.

Each day, local, state and federal governments spend our money in this way. Contrary to Plibersek's foolish statement to Insiders host Barrie Cassidy on Sunday, the inescapable lack of incentives by government to spend our money carefully means there will always be waste and there will always be fat. Waste and fat are guaranteed when governments spend our money. The only question is how much waste and how much fat?

And to answer that question, another refresher course is useful about why bureaucracies grow bigger . Again, honest politicians will help themselves to make the right decisions if they explain why government bureaucracies rarely grow smaller. Again, we will defer to Friedman who best explained the law of bureaucracies in his 1991 Wriston Lecture.

The economist who was once an adviser to US President Ronald Reagan said that the incentives that drive those in the public sector are not too different from the private sector. In both cases, you can always count on people to act in their own self-interest. But the difference between the public sector and the private sector comes down to results. "Just as the West Germans and the East Germans were not different people, yet the results were vastly different," Friedman said.

Why? Here's how Friedman explained it: If I start a business in the private sector with my money, my self-interest not to lose money means that I will want to make sure the business either succeeds or is closed down before I lose too much more money.

If I start that same business in the public sector using public funds, my self-interest means that I won't want to admit I have failed and happily it's easier for me to avoid making that admission when I can argue that the enterprise will work if only more money is invested.

I can argue the enterprise is failing because it is not large enough and it is not receiving enough money. After all, I have a deep pocket to draw on and self-interest says I will draw on it rather than shut down a failing enterprise. That is a government bureaucracy, said Friedman. "If a government enterprise is a failure, it is expanded," said the man described by The Economist as "the most influential economist of the second half of the 20th century -- possibly of all of it".

Imagine if we better understood the perverse incentives that drive governments to spend our money poorly and why government bureaucracies grow bigger, rarely smaller.

We might offer more support when governments try to reduce the amount of money they spend and shrink the size of bloated bureaucracies. Imagine if journalists more often challenged politicians with some basic first principles about the inevitability of government waste. Politicians might stop saying quite so many silly things.

Imagine, too, if politicians like mellifluous-sounding Plibersek trusted voters a little more rather than treating us like mugs. Yes, I know. Now, I'm really dreaming.