Douwe Osinga's Blog: Why governments always need to cut spending

Saturday, June 7, 2003

Why governments always need to cut spending

The Netherlands have a new government. Unfortunately the economy is bad and they need to cut expenditure. It seems logical, but if you think about it for a minute, it is strange. I mean, the economy is bad, it is hardly growing, but that means that in real terms about the same amount of money is available for the government as last year, i.e. in money it is actually more. Why does the government have to cut expenditure when they have the same amount of money as last year? This can only mean that they automatically increase spending each year in real terms, i.e. not only do they increase spending by as much as the inflation, but they also add something each year on top of that. And not to do new stuff, just to do the old stuff. Government gets more expensive each year with quite a bit more then inflation. Apparently we need to cut spending just to spend the same amount as we did before. The beast is hungry indeed.

But what about the government wages? Isn't is logical that the real spending of government increases each year for the same amount of government because wages of civil servants increase? Maybe. But that would mean that the productivity of these civil servants does not increase. If productivity of civil servants would rise in line with the productivity of the market sector, then the wages would go up by about the same amount as the productivity and we would just need less civil servants for the same amount of government. Clearly this isn't happening in reality. On the other hand, if productivity does not increase, one can doubt whether wages should.

One way or the other, it seems best to me, if we would decide what it is that we want the government to produce, see how much that cost and treat any price increases above inflation and failure of the politicians involved.