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Tuesday, March 2, 2004

Stomach to cut government

LONDON -- A British government review, to be published shortly, has apparently suggested that some 80,000 civil service jobs could be cut and up to £14.5 billion ($28 billion) could be saved by 2007 if recommendations such as "streamlining" back-office functions and raising productivity in education, health and law enforcement were followed.

Major savings could also be achieved, the report finds, by changing the way in which the government procures its supplies and by centralizing functions such as human resources. The report calls for establishing a "one-stop" retail network to handle transactions between government offices and British citizens. This should cover everything from taxation to social security benefits.

Are the proposals realistic and could the estimated savings be found? Some skepticism is unavoidable. Savings of this magnitude can only be made if regulations and the monitoring of public services are cut significantly. Huge vested interests are involved and will have to be challenged.

Opposition is likely from civil servants whose jobs are threatened, and this should not be ignored. Displaced civil servants are entitled to compensation for loss of their jobs, and they should have the right to retrain for different jobs.

More influential, though, is the opposition from politicians, lawyers and lobbyists who will argue that their pet regulations are necessary to look after the interests of consumers, taxpayers and workers generally.

The present chancellor of the exchequer, Gordon Brown, has, in every year that he has been in power, complicated the already overcomplex tax system. Changes have all been introduced for what Brown considers worthy reasons, such as helping poorer taxpayers or encouraging research and development. But the result for the ordinary taxpayer is a tax code so complex that only those with few sources of income can complete the forms on their own, let alone make the necessary calculations.

Brown has thus provided a bonanza for accountants and tax advisers. One of the basic arguments for the complexity of the system is that of "fairness," but no tax system can ever be totally fair and the more rules there are, the more taxpayers will try to find new and ingenious ways of reducing the amount they have to pay. These efforts are costly not only to the individual but also to the exchequer.

The complexities of income tax are more than matched by the rules governing capital gains. Firms also have to cope with value-added tax returns, national insurance contributions and corporation taxes. It is not surprising that businessmen are groaning under the burden of tax-related work, which tends to stifle enterprise. The efficiency review will not achieve real savings until the treasury and the chancellor are committed to simplifying the tax system.

Taxation is only one area of bureaucracy that requires streamlining. Another is health and safety. This is a particularly difficult one for any government. When an accident occurs, an immediate outcry demands answers as to why there were no regulations or inspections to prevent it. As a result, new, more stringent rules are drawn up and inspectors appointed, more often than not, without any cost-benefit assessment.

Consumers rightly expect that the food they consume will be hygienically prepared, but the rules and inspections to achieve the high standards demanded are expensive in terms of manpower and resources. Savings can be made in these areas only after careful calculations of the risks involved in modifications.

To improve public services and to overcome inertia, the British government has instituted more and more targets for public services and has increased greatly the number of inspections and audits to ensure that the targets are met.

Some British observers accuse the government, not without justification, of suffering from "targetitis," which has, in some cases, led to declines in morale and the resignation of valuable staff at the health service or in the schools.

Private-sector competition, if not overly hampered by restrictions, should allow dissatisfied consumers to switch to another supplier of goods or services. Competition in the supply of public services is difficult to achieve not least because it can be wasteful. In its plans for foundation hospitals, though, the government is rightly moving toward greater competition in the supply of medical and surgical services. But it cannot dispense with inspections, audits and targets.

It is easier to see how savings can be made by centralizing procurement and simplifying the process of drawing up contracts in public-private partnership agreements, but again some risks will have to be accepted and pet projects may have to be abandoned. The government's experience in information-technology projects (such as for the Inland Revenue and the passport office) has not been a happy one.

If the new report on public sector reform is to be a success, it will require determination and leadership as well as a willingness to take some risks and sacrifice some rules to which ministers and various lobbies are particularly attached. Before new regulations are introduced, proper cost-benefit analyses need to be made. Moreover, existing regulations should not be renewed without similar assessments.

International comparisons are difficult to make because information on which to base comparisons is often lacking, but anyone who has experienced bureaucratic processes in France, Germany, Italy or the Netherlands knows that the rules there are often even more restrictive than in Britain. It will be essential to reduce the number of new regulations emanating from the European Commission in Brussels.

What about Japan? Much is made of administrative reform and the establishment of special regulatory zones, but how much real progress has been made in deregulation? The impression that most foreign observers have is that not much has been achieved so far.

Hugh Cortazzi, a former British career diplomat, served as ambassador to Japan from 1980 to 1984.

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