IAN McAULEY. Reframing public ideas Part 2: The role of government

Jan 5, 2018

We tend to think of a “left” seeking bigger government and the “right” seeking smaller government. But such a framework can see governments simultaneously neglecting important areas while interfering where they shouldn’t.

Sydney’s football stadium in Moore Park is 30 years old this year. Sydney’s Olympic stadium at Homebush is even newer, having been completed for the 2000 Olympics.

Late last year the NSW Government approved a plan to demolish and re-build both venues, at a cost to the pubic purse of $2.3 billion.

Unsurprisingly the decision raised strong reactions, particularly among those who can think of other uses for a spare $2.3 billion (around $1000 per Sydney household).

The more basic question is why governments should be spending any money on venues for sport spectators.

It’s not hard to establish a case for spending public money on community participation in sport. That case rests on savings on spending on health care and the general economic benefits of a fitter population. (See Michael Lambert’s recent article on the costs of obesity.)

But these aren’t venues for the Bankstown third division amateur football team, or schoolkids’ little athletics. They are establishments for corporatised sport, a business sector quite capable of looking after itself without subsidies from the public purse. Sales of tickets and broadcast rights can easily generate enough revenue for elite sportspeople to enjoy a lifestyle beyond most people’s imagination, with plenty left over for tycoons to provide VIP facilities for their corporate and political mates.

Perhaps, if NSW were an oil-rich sheikhdom with public money to spare, or if it had a 1940s-style socialist government occuping the commanding heights of the economy, these decisions may make sense. But NSW has a conservative Coalition Government – the party that’s supposed to exemplify austerity with public funds.

It’s hard to understand this decision because we are conditioned to believe that while parties on the left – Labor, Labour, Democrat, Socialist – stand for “big government”, parties of the right – Liberal, Conservative, Republican, Christian Democrat – stand for “small government”.

Such neat classification, if it ever had explanatory power, doesn’t explain much in 2018.

In the realm of civil liberties that simplistic classification certainly doesn’t hold. Apart from the rare libertarian, politicians of the right have enthusiastically extended “nanny-state” paternalistic interventions on film and literature censorship and on private sexual behaviour. Furthermore, as recent Australian experience confirms, parties on the right have been strong advocates for expanding the surveillance powers of government. Big government.

In the economic realm a more useful ideological classification may be between those who see government as a large, unproductive overhead – a body subject to the unreasonable and insatiable demands of electors – and those who see governments as serving a necessary economic function – a function that the private sector either cannot fill or cannot fill so well.

The former vision is captured in the Liberal Party’s statement of beliefs, asserting that “businesses and individuals – not government – are the true creators of wealth and employment”.  It’s an extraordinary assertion: a toll road owned and operated by Transurban is a useful asset, but a physically similar road, without tolls and publicly-owned, has no value. A nurse in a Ramsay private hospital is doing something useful, while his or her counterpart in a public hospital is an unproductive dependent on the public purse.

This idea is captured formally in a model known as “public choice theory”, a theory dovetailing with economists’ simplified models of how markets work. Citizens elect governments, and in a political “market” demand things like schools, hospitals, roads, police forces, and social security. The art of government is to provide just enough of these services, regardless of their merits, without suffering the consequences of a backlash against the tax burden necessary to fund them.

According to the public choice model it really doesn’t matter what citizens demand – it’s all waste. If people want a new stadium, then it’s OK to cut back on education or transport, because these too are wasteful. If a National Party member in a vulnerable electorate wants an upgrade on a little-used country road, then it’s OK to divert funding from roads subject to congestion and high accident rates.  That’s because one form of waste is as bad as another.

Ideally there should be no public expenditure at all, but if people are silly enough to want these things, then the government’s objective should be to contain public expenditure so that the productive private sector can operate in the space left over. (Such an objective is encapsulated in the Commonwealth Government’s goal of a tax-to-GDP cap of 23.9 per cent, regardless of the nation’s need for public goods and services.)

A more realistic vision, in line with the latter view of government, acknowledges the complementary economic roles of the public and private sectors. It is captured in a statement by a Republican President:

The legitimate object of government is to do for a community of people whatever they need to have done, but cannot do at all, or cannot do so well for themselves, in their separate and individual capacities.

That was Abraham Lincoln’s pithy explanation of the economic role of government – one echoing earlier but more wordy statements by Adam Smith, and one covered in contemporary textbooks on public sector finance.

Unfortunately many Australian universities, whose graduates take up work in public services, have allowed public choice theory to displace this more traditional and economically grounded theory on the role of government.

In an attempt to re-invigorate this theory that acknowledges the legitimate economic role of government, Miriam Lyons and I encapsulated it in a book Governomics: can we afford small government?, covering similar ground to that covered in academic texts, but without the equations and graphs that tend to scare lay readers.

In our conversations with politicians and senior public servants we have often been surprised to find how much of that traditional theory has been new to them. “I had a gut feeling that there was something wrong with privatising electricity networks/subsidising private health insurance/cutting back on the CSIRO but I hadn’t realised that my gut feeling aligned with solid economic theory.”

This gut feeling for the public interest has probably protected conservative state governments from going all the way with the public choice model, and there are a few members of parliament with at least a basic understanding of the economics of the public sector. But without a clear understanding of the economic role of government there is little to stop governments from blowing public money on boondoggles such as stadiums for spectator sports and pork barrel projects in marginal electorates, while denying the community the important services that the private sector cannot provide, or that the private sector cannot provide as efficiently ane equitably as government.


This is the second of a series of eight articles on re-framing public ideas, to be published over January 2018. The first was on Leadership, posted on 3 January.

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