Better growth requires government to spend more money — on itself

Close your eyes. Think of the efficiency gains from wider highways and faster trains. Better education surely boosts productivity. Maybe ambitious climate spending will unlock lucrative green jobs, too.

As markets weigh how much growth to expect from a post-pandemic world, a central question is whether ambitious fiscal plans now on the table can reverse decades of sagging growth. But the best way to direct some of the next wave of government investment is not on bridges and tunnels, but on government itself. 

Close your eyes again and imagine finance ministries that collect all the taxes they are owed. Add up the gains from delivering government benefits and services online. Picture officials with the data to decide exactly where a bridge or tunnel will create the most jobs.

Whatever emerges from President Biden’s grand infrastructure and social services plans, there won’t be nearly enough to bring government operations into the era of remote operations and artificial intelligence. Europe’s investment plans explicitly include a focus on public administration, but the sums look small compared to the need. 

Politicians usually run for office across a divide that argues for bigger or smaller government. But the simplistic debate obscures the potential gains from better government. Public spending represents about a third of global GDP, and a 2017 McKinsey study estimated that the world’s then-combined fiscal deficit of $4 trillion (before relief and stimulus spending rose to unprecedented levels) could be substantially closed if most governments adopted the best practices of their peers in health care, education, safety, transportation and tax collection.

Sustainable economic growth naturally depends most on the right macroeconomic policies in the right part of the cycle. But the concrete benefits from better policy administration are striking. Denmark has managed to extend life expectancy by 1.8 years without raising per capita health care expenses. Poland has increased test scores substantially while keeping primary and secondary education budgets mostly flat. New Zealand improved confidence in its police while cutting overall expenditures. Unsurprisingly, improving government-sector efficiency produces better growth in emerging markets, too.

Most talk of government reform focuses on saving money. The U.S. Government Accountability Office has a list of 112 reforms it claims would save tens of billions of dollars by eliminating waste and duplication. But more important than these savings are investments in a public sector that makes the private sector more effective. 

Collecting all taxes is an excellent start. The U.S. Treasury estimates some 15 percent of owed taxes go unpaid for an annual loss of approximately 3 percent of GDP. It further estimates that an $80 billion investment in staff and systems over the next decade could bring in an additional $320 billion — a good return in anyone’s book. (More controversial reporting by banks on financial flows could secure another $460 billion, by Treasury estimates.)

Beyond the extra revenues, more efficient collections mean a U.S. government that can balance its budget, borrow less, and free resources for private investment. Collecting everyone’s taxes also eliminates the distortions across the economy that penalize those firms and households that follow the law. 

Redesigning the delivery of government services can offer a similar boost to potential growth, if only by reducing the time spent trying to secure a new driver’s license, a subsidized loan, or a building permit. Estonia has taken its government services online, which attracted a substantial community of tech firms to the country. 

Just as many companies got a crash course in shifting to remote operations when the lockdowns hit, some U.S. state and local agencies managed at least some of the transition, too. In select cases, with the help of expert tech volunteers, creative officials adopted new online tools to deliver rental assistance, unemployment benefits and emergency food without requiring physical visits to their offices.

Most promising, perhaps, are the immense gains that come from better analysis for important government decisions. As our mobile devices know all too well, commercial firms tap into sophisticated databases on consumer preferences, traffic patterns and spending habits all the time. They don’t need to conduct customer surveys or count automobile traffic at the intersection when they can aggregate and analyze actual transactions. 

Just think if governments regularly applied similar tools to decide where a highway exit would launch more new businesses or which kinds of public events generate the most additional spending. These are small investments in analytical tools that can produce substantial economic outcomes.

If the current impulse to spend on hard and soft infrastructure is really going to deliver stronger and more sustainable growth, it has to include smarter and more efficient government. There may be better investments, but there aren’t many. 

Christopher Smart is managing director, chief global strategist and head of the Barings Investment Institute. Under President Obama, he spent four years as deputy assistant secretary of the Treasury and two years as special assistant to the president for international economics, trade and investment. Follow him on Twitter @csmart.