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What’s conservative about a target for government spending?

Posted By on November 3, 2014 @ 12:15

The price is right? [1]Imagine you decided to do your weekly grocery shopping this way: you go into Coles or SuperBarn and tell the manager that you haven’t been spending enough on groceries and henceforth have set yourself a target of spending a minimum of X% of your weekly income on them. How many of you think you’d get a good deal?

Last year, my colleagues Peter Dean and Andrew Carr made a compelling case [2] (reiterated by Andrew again here [3]) as to why explicitly targeting a figure of 2% of GDP to spend on defence makes little strategic sense. But that’s not the only problem with the 2% target. There’s also the issue of the perverse incentives that such a target would create for policymakers, public servants and defence contractors.

Private businesses have incentives to cut costs because they get to keep the savings. The same is not true of the public sector. At the end of the financial year, public servants have incentives to spend their entire remaining budget. If they don’t, that’s a sign to their superiors that they can make do with less. So what do government departments tend to do when you throw cash at them in a short space of time? Spend it like it’s going out of fashion on anything they can justify. Ask anyone who worked in the public sector in the UK during the Blair-Brown spending splurge prior to the 2008 GFC (my mother did, and she has some choice stories).

So pumping lots of cash into any area of government quickly is likely to lead to the department in question taking on all sorts of new projects (broadly defined) that aren’t really necessary so that they can justify their enhanced budgets. Yet it gets worse.

Once a project (whether it’s the acquisition of a new weapons system or an overseas mission) is taken on, the sunk-costs fallacy comes into play. ‘We’ve spent so much on this already’, it’ll be maintained, ‘that we might as well see it through to the end’. So if and when the fiscal situation changes and the amount spent on defence needs to be reduced, it’ll be hard for policymakers to extricate themselves from those unnecessary projects they took on when they were flush with cash. Cuts to defence, unlike those to other departments, can also be portrayed as putting the nation at risk in a way cuts to civilian spending can’t be. So the problem is even more acute here than in other areas of public policy.

Moreover, if I were a defence contractor and I were negotiating with a government I knew had an (implicit) minimum amount it wanted to spend on defence, wouldn’t I be much more likely to pad out my bid than if I were negotiating with someone who’d be happy to walk away if the price wasn’t right? Wouldn’t I also do my best to tie my buyer down with a long-term contract that would be hard to renegotiate in future?

One of the major reasons why people across the developed world vote for conservative parties is that they are thought to be better than left-wingers at reigning in excessive government spending, partly because they recognise that the types of incentive problems I outlined above are pervasive in the public sector. Some conservatives overseas [4] (take a bow, David Cameron) don’t shirk from applying the same logic to defence spending that they apply to other areas of spending: figure out what you think the country needs and then try to get it at the lowest possible cost to the taxpayer. However, conservatives in other countries [5] (such as the US Republican Party) seem to think that government agencies that spend money on things they like (such as the military) are immune to the incentive problems you’d find amongst government agencies they don’t like (anything to do with welfare spending or public healthcare provision). For Australia to set a 2% of GDP target for defence spending while cutting spending on other things is to make exactly the same mistake.

Conservatives like to champion the wisdom of families and individuals. When you go to the supermarket, you go to buy things you need, not to spend a pre-determined amount of money. That’s why retail stores are under constant pressure to produce good deals for their consumers. Getting what you want more cheaply than you budgeted for is a good thing. David Cameron understands that this is how it should be with defence spending while Paul Ryan does not. If Australia’s Liberals are looking for a role model in how conservative parties should deal with defence spending, they need to look to London and the supermarket aisles of Australia, not Washington DC and the Republican Party.

Charles Miller is a lecturer at ANU’s Strategic and Defence Studies Centre. Image courtesy of Flickr user Matt [6].



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URLs in this post:

[1] Image: http://www.aspistrategist.org.au/wp-content/uploads/2014/11/8653787902_dea97a1f5b_z.jpg

[2] a compelling case: http://www.securitychallenges.org.au/ArticlePages/vol9no4CarrandDean.html

[3] here: http://theconversation.com/factcheck-is-defence-spending-down-to-1938-levels-17427

[4] Some conservatives overseas: http://www.theweek.co.uk/uk-news/53830/george-osborne-spending-review-winners-losers

[5] conservatives in other countries: http://www.nytimes.com/2014/04/02/us/politics/paul-ryan-budget.html?_r=0

[6] Matt: https://www.flickr.com/photos/d35ign/8653787902

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