OECD report outlines debt challenges

A new OECD study on how governments can provide improved services at lower cost to their citizens highlights that the increasing public debt burden in many industrialised countries will force governments to reform and improve efficiencies.

As governments have been forced to increase spending to unsustainable levels in response to the economic crisis, the urgent need for rationalisation has to be balanced against the need to support a still fragile process of economic recovery, the organisation for economic cooperation and development said.

‘Governments can learn from each other’s experience in order to provide the most cost-efficient services possible for their citizens,’ said OECD Secretary-General Angel Gurría.

The report Government at a Glance 2009 identifies a number of key governance challenges and raises fundamental questions with regard to the role of government, its means and its inefficiencies following the global financial and economic crises.

The report states that the capabilities of governments are currently on trial as they have never been on before.

Faced with policy challenges and demands that outweigh those of the past both in size and complexity, governments have to provide the solutions that citizens in many countries expect.

Long-term concerns ranging from unemployment, climate change and ageing populations to migration have to be reconciled with short-term financial efforts to stimulate the economy.

At the same time a more interconnected globalised world demands that governments re-think how they establish long-term strategies to improve the productivity and competitiveness of their economies, the report said.

Government expenditures averaged 40 per cent of gross domestic product in OECD member countries and governments employed roughly 14 per cent of the labour force, according to the report.

This contrasts with 29 per cent government spending in relation to GDP in Cayman and 10 per cent of the labour force being employed by the Cayman government.

However, it has to be remembered in this context that most OECD countries are able to take a significantly larger share of GDP as government revenue than Cayman, which so far does not impose direct taxes.

The size of government varies across OECD countries. Norway (59 per cent), Denmark (57 per cent), Sweden (56 per cent) and Finland (53 per cent) took the highest proportion of GDP in revenues, while Mexico collected the least (20 per cent).

The Cayman Islands collected roughly 23 per cent of its GDP in government revenue in 2008.

The report demanded public sector reform in three key areas to respond to financial, economic, environmental and social challenges.

Firstly, governments needed to address their deteriorating fiscal situation through budget reforms and restrictions on government spending.

The report found only five OECD countries used some kind of fiscal rule, for example with regard to debt levels or a balanced budget, as a means to restrict public expenditures.

These are precisely the types of rules that are contained in Cayman’s public finance and management law and which made it necessary that the Cayman government had to request permission from the British government to raise additional debt.

The report also detailed that in their search for efficiency gains and due to budget restrictions governments increasingly turned to the private sector to deliver services.

In 2008, the share of government-financed goods and services provided by private companies has increased 19 per cent from 13 per cent in 1995.

Governments will have to be more selective in the services they provide and consider how to provide them, the report said.

Governments will further have to develop their strategic capability to deal with complex problems, for example by changing recruitment processes, bringing in more outside experts and regulatory impact analyses.

Due to the increased scale of government intervention in the economy and society, transparency and accountability have become even more important.

Public procurement, the area of government most susceptible to corruption, accounted for between 10 and 25 per cent of GDP in OECD countries.

Although all OECD countries have installed supreme audit functions, fewer than half were able to deliver audited government accounts within six months after the end of the fiscal year, as recommended by OECD Best Practices for Budget Transparency, the report found.

However, it concluded that the increased focus on transparency is reflected in reforms to budget processes and legislation promoting access to information.