ETHOS Issue 25, April 2023
Why is public resourcing going to be an important concern for governments in future?
The next decade will be dominated by three trends—what fellow economist Mark Carney and I have framed as the 3 Ds—Digitisation, Decarbonisation and Deglobalisation. These will require us to think differently about what we do, but it is clear this will be a future in which government will be required to do more.
For instance, in the coming decade, we are going to see countries spending a lot more on defence, as the world is becoming more insecure. Private sector delivery of goods and services has also become more data-based and efficient, raising people’s expectations of service delivery in general.
This means the government’s share of GDP is expected to rise. In the private sector, you’re paying for these better services. But in the public sector, there’s a limit to how much you can meet these higher expectations purely through tax-based public funding. In countries like the UK, for instance, it’s taboo to even think about market pricing for healthcare services because of perceived inequalities in affordability.
We will have to get much more
efficient in what we do and find better ways of doing the same things, because we cannot just keep throwing money at problems.
So, increasing demands on the public sector are not going to go away, but there is a limit to how much public funds we can raise through taxation. The question is how we are going to manage both the demand for and supply of government services. We will have to get much more efficient in what we do and ﬁnd better ways of doing the same things, because we cannot just keep throwing money at problems.
How should governments think differently about their longer-term resource concerns?
In the UK, as with many countries including Singapore, you have populations that are getting older on average, driving up the dependency ratios. In the UK, we also see the rise in what we call ‘inactivity’ in the 50+ age group. During COVID, many in this group worked from home and a number of them realised they preferred it to commuting to work—at the end of the lockdowns, they decided to exit the workforce rather than return to the office. This raises the question of whether their pensions are enough to keep them going. For now, they have decided that they are better off not working than working.
As a group, economists might narrow-mindedly say well, we just have to get them back to work. But is that really the right thing? What we ﬁnd is that this is an age group that are thinking that they have enough and are not particularly interested in earning money anymore. At my charity Pro Bono Economics, we have evidence that many more people are now thinking about volunteering instead. In fact, many of these people are active and very highly skilled. There are a lot of things we can do to engage with them and make them socially productive, increasing the supply side of important activities.
One issue we have to come to grips with is that volunteering generates no income and will not show up in GDP. This is one reason why we should not judge societal success by GDP growth rates. For instance, parents who decide to stay at home and look after their children are doing something valuable, yet it is going to hit GDP as opposed to them going into traditional employment. We need to bear in mind that if they do go to work and pay for childcare, there will be a lot more taxes generated compared to if they stay at home. So there are public finance implications to thinking this way, which will need to be factored in.
But more and more, we see countries around the world trying to find better alternatives to GDP, with some referring to happiness indices. I don’t use happiness much: as a species, we are evolutionarily guided towards immediate, short-term happiness and away from worrying about the long term. Instead, we should be thinking about how people can do the right things to lead worthwhile, satisfying lives over the long run.
Doing this would also reduce demands on the public sector. For instance, if we improve people’s diets, get them exercising, stop them smoking and so on, we keep people healthy, give them a better quality of life, and also reduce pressure on healthcare resources. This would also feed back into people being more productive, which improves the tax base with more resources to meet other needs.
We should be thinking about
how people can do the right things to lead worthwhile, satisfying lives over the long run.
How can governments better appreciate and harness the public value generated by other sectors?
A lot of the conversations we have are about whether something should be done by the government or the private sector, and we leave out the social sector completely. I think it would be much better if we think about these three sectors, and consider: what are their comparative advantages?
The social sector has value that is distinct from public services. A government can generally only make standardised, broad provisions. But for many issues, you have to be very local—you have to think about a community’s or an individual’s unique needs. You need people who know the ground: who really needs help and who doesn’t. It’s not about legislation but local knowledge, and that’s a comparative advantage of the social sector.
A lot of the conversations we have are about whether something should be done by the government or the private sector, and we leave out the social sector completely.
The government should be asking: what are the areas the social sector does best? How can government and the private sector support the social sector so that everyone is working towards their comparative advantages?
Now, what is the right balance to strike between the sectors? This will depend on the societal context. It will be place speciﬁc. An appropriate balance for Singapore might be different from one for a bigger country like the UK, and the US will be different again.
In a place where people are very compliant with rules, a large public sector may make sense and there’s less of a need for a social sector. In the US, there could be greater acceptance of a larger role for the private or social sectors. A place that functions well with a relatively high tax rate, such as Scandinavia, could operate with a large public sector because there is cultural acceptance, whereas you could not get away with that in the US. So that’s going to have an impact on the size of the different sectors.
It will also depend on the local culture and people’s preferences: whether, for instance, there is a stigma associated with services provided by the social sector, or by government, or whether there is a culture of philanthropy with very high net worth individuals finding ways to do things the state cannot do.
What is the right balance to strike between the sectors? A fundamental principle is: who does it best?
So, you’ll need to calibrate differently in different places. To my mind, a fundamental principle is: who does it best?
Part of the problem is that there’s not enough measurement of the impact of the social sector. I chair a commission called the Law Family Commission on Civil Society, which has to do with the social sector. Together with Andy Haldane, Chief Economist of the Bank of England and one of our trustees, we have been working on ways to measure the output of the social sector, and it turns out that their contribution is being underestimated possibly by a factor of up to ten.1
The social sector can be relatively inefficient, partly because they are not held to account in quite the same way as the private or public sectors. People go into charities because they are passionate about, say, curing a disease; they are not passionate about spreadsheets and surveys. It’s good for them to say, well we’re helping all these people. They are doing this out of the goodness of their heart. The fact that they could do it much more efficiently is neither here nor there to them.
We also ﬁnd charities spending huge amounts of their money on just applying for grants, in a way that’s very inefficient. This is why at Pro Bono Economics, we have been trying to think about general ways of prompting the social sector to become more productive; to unleash their potential.2
We provide charities with ways to measure their impact, doing simple things such as cost-beneﬁt analyses.
What is needed to nurture a more productive relationship between the sectors?
For government, there is ﬁrst a real need to understand the different sectors. Singapore is very good at getting civil servants to understand the private sector and getting the private and public sectors to work together. The UK is not as good: we have massive pay gaps, and a culture where we keep the private sector at arm’s length because of potential conﬂicts of interest.
But there should be few such conﬂicts between the public and social sectors. We could have internship sand secondments, to provide pathways for those in public or private sector careers to work in a charity.
Now, anyone who has worked in the public sector would tell you that working across departmental boundaries is the hardest thing. This is unlike the private sector where it’s unimaginable for the CEO to sit alone as the decision maker while some other committee does the work for him, to come along and just say yes or no. They would do it together.
Governments should be thinking much more about cross-departmental teams that break down functional barriers, with all the key people at the table. For example, civil servants might analyse what is going on, give the best facts, saying what we can do to help and what our constraints are, so that the politicians can have a good evidence base. The political leadership can then talk about the kind of solutions they have in mind, and the officials could then respond in turn to what could or could not work. But that’s just step one.
If you put all three sectors in a room to solve issues together, you might come up with new and very different answers which have everybody contributing, as opposed to it just being a government problem.
Step two is realising that perhaps the government cannot solve this problem entirely on its own, and you need to have a meeting where you bring in the other sectors to help address the problem. And then you get the three sectors together to come up with an answer where there is mutual advantage. If you put all three sectors in a room to solve issues together, you might come up with new and very different answers which have everybody contributing, as opposed to it just being a government problem.
One other advantage is that the other sectors get to understand why government regulates in the way they regulate. They can then learn how best to work with policy as opposed to ﬁghting it—while at times pointing out that policy objectives aren’t quite right and trying to get them changed. Then we start to work together to get better societal outcomes as opposed to regarding it as a game of getting around the rules to maximise proﬁts.
So, what we need to look for are people who can get collaboration across sectors. It could be someone who has diverse experience in actually working in one or more of these sectors, who will understand the cultures of these sectors and how to make them appreciate each other.
You want collaborators, and you also want innovators—because we’re not going to solve these problems without some innovation. For really difficult problems, you need to experiment more, and try different things, and some of them might work along the way.
In the social sector there is great nervousness about having something which seems to fail. We need to have the capacity to understand that it’s not a problem if a social sector organisation spends some money on trying some things which turn out not to work. So you could bring in some private sector people who understand about innovation, about risk-taking, about not being scared to fail. But this can be difficult in the social sector. In the beginning, time might be better spent just helping charities put in competent record management systems and spreadsheets, or other kinds of administrative infrastructure that we take for granted in the public and private sectors.
One of the issues I am worried about is what I call stranded skills. A lot of people with a set of skills which they thought would keep them in good employment for a long time could end up being stranded by developments in artiﬁcial intelligence (AI). We will need to think carefully about how to get to the kind of world where we are all going to be living longer, and how we all need to retrain at different times.
This could ﬁt in with my idea of spending some time in different sectors, doing different things, and coming back as someone who understands the interaction between sectors. Indeed, we are already starting to see innovation being the consequence of being multidisciplinary, from economics to psychology and so on, in ways which will be crucial to the public sector. The point is also about trying to see people’s activities as things that bring them increases in wellbeing, as opposed to just work.