30 October 2015

Why does government fail?


Yesterday, I outlined how the UK is currently far from the ‘neoliberal’ country lamented by many on the British left. In historical terms, we have incredibly centralised government, very high public spending, monopoly state provision of services, and increasing regulation in almost all areas.

Despite this, or because of it, depending on your instincts on government, the UK faces many poor outcomes: our fiscal position is still poor with unsustainable forward-looking liabilities; our education outcomes are mediocre and health outcomes poor compared with other countries; high levels of regulation in many areas raise costs and restrict freedoms; and our social protection system is expensive, but still leaves many in need whilst making it more difficult for poor workers to earn their way out of poverty.

The causes of these failures are multi-faceted in different policy areas. But there are some overwhelming structural reasons why central government fails so often.

Size and complexity. The range of activities the UK government engages in is extraordinarily diverse – making the government like an unwieldy conglomerate. Markets often create pressure for bloated corporations to refocus and shed their low-value activities, but there is no mechanism for government to do so. The sheer volume of activities makes it difficult for politicians to manage the bureaucracy effectively, and even tougher for the legislature to hold the government to account. This is worsened by the fact governments often have policies with directly conflicting objectives across departments and functions. As the scope and size of government activities has expanded, trust in government has collapsed. In May 2014, a ComRes poll showed an overwhelming majority – 71% – said they didn’t trust government.

Centralisation of decision making. Collective decision making is centralised by construction. Furthermore, power in the UK is further centralised in Westminster. In contrast to market exchanges, which provide information in the form of prices, there is no real way of knowing whether government activities create value. Taking decisions further away from people also worsens the ‘knowledge problem’, meaning politicians are unable to account for differing circumstances of individuals, making things like welfare systems crude instruments. Making decisions so far from the people they affect also leads to the ignoring of ‘unseen’ effects or unintended consequences. Meanwhile, too much centralisation at Westminster prevents experimentation, and proper democratic or even direct accountability to end users of services. Providers of services and local government are unable to tailor their activities to meet the differing wants and needs of individuals, families or localities. Little wonder then that our polling found that over three quarters (77%) of the British public feel they have not very much influence, or no influence at all on the UK government’s decision-making.

Monopoly provision. In a range of areas, including the most important services, the UK government has a virtual monopoly on provision. Monopolies on this scale lack external performance comparisons, and a lack of competition means there is no threat of customer loss or bankruptcy. It’s these rigours which drive innovation, continual improvement in management techniques and ultimately cost reduction for companies in the market sector. The fact that these monopolies are guaranteed state funds and privileges also creates significant barriers to entry for potential competitors. This prevents entrepreneurial activity and the process of new entry and creative destruction which characterises dynamic market processes. Proponents of government monopoly services often like to claim that a virtue of state provision is so-called ‘democratic accountability’. But the public don’t seem to agree. Just 9 per cent believe that who public services are run by (i.e. whether a private company or the state) should be the most important consideration for public services, rather than cost of or quality. Less than one in five say they feel they have at least a fair amount of influence over school services (17%), hospital services (15%) or public transport services (14%).

Vested interests and political incentives: The sheer volume of state activity encourages vested interests to lobby the government for special privileges and favours. This can sometimes be overt – see, for example, various subsidies (the recently announced tax credits for films and favours given to the energy sector). Often though vested interests obtain favours from politicians purely as a result of politicians’ desires to win elections. It is perhaps unsurprising then that two in five Britons believe politicians make decisions based on party loyalty (43%), and a third say they make decisions based on their own interest (32%). In contrast, less than one in ten say politicians make decisions based on what’s best for the country (8%). The public also think that politicians legislate too much and three quarters (74%) agree that often politicians propose new legislation to favour certain groups.

The political incentives for this are heightened because the benefits of certain policies to groups are concentrated but the costs more hidden and diffused over all taxpayers.

Poor management and culture of inertia: A successful organisation – a business, school or charity – will have a leader who is an experienced manager, and has an in-depth knowledge of its customers, services, systems and staff. Ministers and civil servants do not match this profile. They often lack this experience, and in the case of ministers and permanent secretaries often change their jobs so often that they have no time to gain it, or to be held accountable for their policies or performance. The Department for Transport had three permanent secretaries in the 2010-2015 Parliament, for example. The former Labour politician John Reid held seven Cabinet positions in eight years between 1999 and 2007.

The culture of the civil service has proven a major obstacle to reform too. The Civil Service Reform Plan described the culture as “cautious and slow moving, focused on process and not outcomes, bureaucratic, hierarchical and change resistant.”

Over the next five years, the IEA’s new Paragon Initiative project aims to assess every major function of government activity, taking into account these structural causes of failure. We want to get as much buy-in from those implementing policy, civil society institutions, and the general public as possible – to devise a genuine roadmap towards a more prosperous Britain with better public services and social outcomes. Only by acknowledging the failures of government though can we think about the policies necessary for a better world.

The Paragon Initiative has been launched by the Institute for Economic Affairs today. A copy of the launch paper and associated public opinion polling can be found here and here

Ryan Bourne is head of public policy at the Institute of Economic Affairs and director of the Paragon Initiative, launched yesterday.