The Hindu Business Line : On how much is spent and how it is spent

Growing public expenditure is a persistent problem, both in the developed and the developing countries. In the following review, D. Murali highlights the main factors contributing to expenditure growth and alternatives to improve and sustain expenditure management, based on `four pillars' — rules and fiscal responsibility legislation, risk identification, transparency and accountability, and infrastructure development.

WHAT is common between a row of police cars accompanying a Minister here, and scores of buses taking people away from the Rita-zone, in the US? Government expenditure. As for the latter, Uncle Sam may be guided by the latest Bush-ism, "It's going to cost whatever it costs". And about the former, the less said the better.

Government, once elected, is usually never counted on to deliver its promises. Nor do most people ever hope that there can be reins on sarkari karcha. Which is why it may seem that A. Premchand is launching an ambitious topic in his new book titled, Controlling Government Spending, from Oxford University Press (www.oup.com). But look around; there is ample evidence that `government expenditure' is in focus.

For instance, to make both ends meet, the Council of Social Service of New South Wales has put forth startling suggestions to the Government, one learns from the day's news on The Sydney Morning Herald. The Council says that car parking levy should be doubled to $1,700 a year in the city and that a congestion tax, similar to that in London, be levied, requiring motorists to pay $4 to $5 every time they came into the city. "It would cost car users as much as $3,000 a year to drive to work in the city and park there, raising an estimated $140 million," reads the story on www.smh.com.au.

An unflattering report of the Auditor General (AG) on public sector is talked about on http://allafrica.com, in an opinion piece dated September 20 by Bartholomew Armah of the Institute of Economic Affairs. He informs that personnel emoluments account for nearly 30 per cent of Government expenditure, crowding out categories such as services and investment. AG's report indicates that there is considerable scope for government to reduce its expenditures and increase its revenues through more effective management of its limited resources, states Armah. "Some of these changes do not necessarily require more resources, but simply a will to enforce existing policies and to change policies that appear to be detrimental to the interest of the economy."

In the US, The Daily Item of Lynn calls for `oversight of Government spending on Katrina'. With Hurricane Katrina reconstruction costs estimated at upwards of $200 billion, some House Republicans are launching `Operation Offset', a proposal to cut $500 billion in other government spending to pay for the Hurricane Katrina efforts, reads a posting on www.dummocrats.com. The Web site's editor weaves a possible Ronald Reagan view of the situation: "He'd say something like `When your family has an unexpected expense, like when Johnny decides he wants to go to college, or when Suzy needs surgery, you don't run up your credit card debt — that will get you into more trouble in the long run. What you do is, you cut back. You scrimp, and you save. You don't take that trip to Disney, not that year."

The problem with the politicians, though, is that they also want to take that trip to Disneyland, rues the Web site.

If that was in praise of simple communication of an ex-Prez, Milton Friedman had this to say on government spending, when in January 2003, the White House had put on a little ceremony in honour of his 90th birthday: "If you spend your own money on yourself, you are very concerned about how much is spent and how it is spent. If you spend your own money on someone else, you are still very much concerned about how much is spent, but somewhat less concerned about how it is spent. If you spend someone else's money on yourself, you are not too concerned about how much is spent, but you are very concerned about how it is spent. However, if you spend someone else's money on someone else, you are not very concerned about how much is spent, or how it is spent."

On `Getting Better Value for Money in Public Spending', there is an interesting speech by Roger Kerr on www.scoop.co.nz, where he begins with Friedman's parable and then outlines a simple test: "The current tax system in New Zealand probably imposes economic costs of at least 50 per cent for the last dollar of revenue raised. To produce a net gain in welfare, therefore, $1 of marginal government expenditure has to deliver a benefit of at least $1.50. Many current government programmes would not pass that test." Kerr also lays down a list of conditions to be satisfied before the Government spends money.

Quite aptly, as Premchand observes, growing public expenditure is a persistent problem both in the developed and the developing countries.

The author proceeds to look at the main factors contributing to expenditure growth, and explore alternatives to improve and sustain expenditure management. He bases his suggestions on `four pillars', — rules and fiscal responsibility legislation, risk identification, transparency and accountability, and infrastructure development.

If that goes over your head, try this plain-speak from a Machiavellian quote cited in the book: "Physicians say of consumption, that in the early stages of this disease it is easy to cure but difficult to diagnose; whereas later on, if it has not been recognised and treated at the beginning, it becomes easy to diagnose and difficult to cure. The same thing in affairs of state."

Chapter 1 discusses `financial management', and its `anatomy' comprising four stages, namely, policy controls, process controls, regulatory tasks, and efficiency controls. In practice, however, process controls get disproportionate attention, notes Premchand. Lacking in performance-oriented financial management may be the lesser evil, because "the system has several soft constraints and perverse incentives that lead to contrary results". There should be incentives for spending agencies to search for economies, argues the author. He also emphasises the need for `peer review of the operations' to ensure that the Government's approaches and practices stay contemporary.

While discussing `expenditure control' Premchand cites Kautilya's Arthasastra. It speaks of limit to all salary commitments and expenditure on public works - to one-quarter of the revenues collected. The role of the auditor was considered to be the most significant, in Kautilya's scheme of public finance. The auditor was given extended powers to look into records, and to have daily access to the royalty who were briefed, on the fiscal status of the kingdom!

There can be many measures of performance, but the community has its own methods, notes the author. He recounts the example of how when offices started to work only after 11 a.m. (an hour after the scheduled opening) as in the past, people drew the inference that no material change had taken place in the approach of the Government. Premchand discusses the pros and cons of accrual accounting, which is currently pitched as a priority goal in Government's bookkeeping.

The chapter on `advancing structural reforms' identifies the factors that have contributed to stagnation or failure in expenditure management. One of these is the over-reliance on "interaction with small groups of interlocutors in aid-receiving countries". Premchand says that the process was no more than a localised discussion between specialists from financial institutions and vested interests at the receiving end. "The reform was essentially viewed as an administrative exercise as an administrative exercise aimed at establishing or strengthening the existing regulatory mechanism, and hardly any role was envisaged for the legislative oversight bodies." A point that is worthy of Parliament's attention.

"The fault, dear Brutus, is not in our stars, but in ourselves," reads a quote from Shakespeare's Julius Caesar, cited at the start of a chapter titled, `Ethical dimensions of expenditure management', and dealing with an important aspect of the book's subtitle, `The Ethos, Ethics, and Economics of Expenditure Management'. A distressing section explains `estimational fraud' and the predictable pattern in policy making. "First a crisis is created; second, pressure is brought on the government to find an immediate way out... ; and third, governments are persuaded to begin making budgetary allocations."

What happens then? "Once a project or a programme is included in the budget and an allocation, however small, has been made, it gains legitimacy and a momentum of its own that is difficult to stop." It may make you wince to read that "those who get a toehold in the budget begin after a stage to claim more resources than originally estimated, and gradually crowd out other deserving projects."

The author refers to a recent analysis of 15 mega projects undertaken in several countries; the study found that decisions were not made on the basis of `honest numbers'. A disquieting quote from Daniel Greenberg's book, `Science, Money and Politics: Political Triumphs and Ethical Erosion' speaks of `mercenary motives' present in `episodes of fabrication, falsification and plagiarism — the formally proscribed categories of scientific sins' in the US.

Premchand delineates the five stages of fiscal transparency beginning with how the kingdom insisted on accountability to safeguard revenue. For example, Aristotle had written about "the risks associated with the handling of large sums of money by officials and the need for systematic accounts that would illumine the whole area."

We shall not spend a large expense of time before we reckon with your several loves, says Malcolm in Macbeth. But time spent on this book may well be a worthwhile investment.

Economics@TheHindu.co.in

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On how much is spent and how it is spent