There is no evidence that cutting spending is actually saving money according to CTU policy director Dr Bill Rosenberg.  In his latest economic bulletin Dr Rosenberg says the evidence shows there are many similar sized nations to New Zealand which spend a higher proportion of their national output on government services, and have considerably higher standards of living.

“Currently Treasury, the Reserve Bank, ACT and two of the government’s taskforces are all calling for reductions in government spending. The government has even considered the idea of a cap on government spending, but instead put a cap of $1.1 billion on ‘new’ spending – its ‘operating allowance’. But the evidence that smaller government as such is better for growth or innovation or quality of life is simply not there.”

“Around half of government expenditure is “transfer payments” – such as New Zealand Superannuation, unemployment and other benefits – which help to make society fairer but are largely money-in, money-out, reducing the size of the private sector economy very little. In the end it is quality of spending that matters.”

Dr Rosenberg says one example of how quality counts is in the area of health.

According to the OECD, the US with a largely private health system spent 16 percent of its GDP on health in 2007. New Zealand, spent just 9.2 percent, overwhelmingly through government funding. Yet the US has inferior health outcomes in many respects to New Zealand. It has lower life expectancy for example, and (in 2007) large parts of the population were without insurance coverage.

“So comparing government spending in the US and New Zealand not only ignores the fact that the government in the US doesn’t provide nearly as much health care as New Zealand,” said Dr Rosenberg. “The US economy and population get vastly inferior results from its health system. We are demonstrably better off with that higher government spending.”

Clarification

“Cutting budgets won’t necessarily save money” the headline of our article on Dr Rosenberg’s comments last week was misleading. The statement in the story “there is no evidence that cutting spending is actually saving money” did not accurately reflect Dr Rosenberg’s comments either. Dr Rosenberg’s actual point was that cutting government spending isn’t necessarily a cure to a range of economic problems despite being commonly sold as that. As he said, “the evidence that smaller government as such is better for growth or innovation or quality of life is simply not there”. However, Dr Rosenberg notes that cutting expenditure may lower revenue requirements or help pay off debt and that will sometimes be necessary. His full commentary, upon which our story was based was confronting the notion that ‘smaller government is necessarily better government’.