Reducing waste in the public sector and upgrading services

The exercise of fiscal policy in the member states of the European Union is subject to constraints, both because of the restrictions imposed by the Stability Pact and due to the tax competition among members which vie to attract foreign investment by lowering rates. On the other hand, the pressures of public spending are expected to intensify in coming years due to aging populations. Given, therefore, that the margin for raising taxes is limited and the debt has to be reduced, fiscal policy will inevitably have to turn toward a more efficient use of resources, on the one hand, and the composition and quality of public spending, on the other. It has been estimated that under present conditions Greek public spending for pensions must be increased by about 11 percent of gross domestic product (about three times the EU average) by 2040. It is also widely accepted that the provision of public services and the related spending is inefficient; a recent study (European Central Bank, Working Paper 242, July 2003) on the efficiency of the public sector in 23 member states of the Organization for Economic Cooperation and Development (OECD) ranks Greece in last place (23rd) and in 14th as regards the efficiency of public services and the resources used for their provision, respectively. A reformed fiscal policy must be based (as already done successfully in many OECD members) on certain targets, the most important of which are the application of fiscal rules and the bolstering of competition and overhauling practices in the management of expenses. Fiscal rules should include a prolongation of the budget period beyond one year to take into account the economic cycle; increased transparency, particularly as regards collection costs for public revenue; and a results-oriented system in public spending. Boosting competition within the public sector and between the public and private sectors could lead to cutbacks in expenses and a marked improvement in the efficiency of public services. Efforts to reform management practices in public spending by introducing specific performance indicators present significant difficulties, as its success depends on a particularly careful determination of targets and criteria of evaluation. What is needed is to combine a reduction in economic inequality and poverty, and dealing with social exclusion, with economic growth. According to European Union data, Greece is ranked second from bottom among members in terms of the composition of public expenses and their impact on economic growth. Essentially, this is due to the low level of unemployment benefits and the limited amounts devoted to active employment policies and research and development. (1) Dr Panayiotis Athanasoglou is an economist.