Time for touch of budget discipline

PUBLISHED : Saturday, 10 March, 2001, 12:00am
UPDATED : Saturday, 10 March, 2001, 12:00am

There ought to be a law. When the financial secretary makes his Budget speech, he always has a good deal to say about how Government should restrain expenditures and keep cost increases down.

Yet, when you look behind the figures to see who is better at keeping cost increases down, what do you find? Yes, indeed, it is the private sector that does the better job and somehow the financial secretary's injunctions to his subordinates do not seem to travel far outside the Legislative Council chambers.

The fourth-quarter economic figures released with the Budget speech on Wednesday show that nothing has really changed. Inflation remains much higher in the public than in the private sector.

Here is how you work it out. First you go to the dollar-of-the-day figures for gross domestic product and take out two components - government consumption expenditure and public fixed capital formation. Next you take the same two components out of the 'real' inflation-adjusted GDP figures and work back from the difference what inflation in them was. Then you do the same for the rest of the economy to get the private-sector equivalent.

The results are shown in the first chart on the basis of a two-quarter average to smooth the figures out a little. They say that inflation in the public sector has come down steadily since 1994 but still shows only a marginal deflation rate, while prices plummeted in the private sector in 1998 and private-sector deflation last year was almost 8 per cent up to September.

The difference between the public and private sectors shows up most clearly when you look only at the fixed capital formation component, most of which consists of construction for government. As the second chart shows, what you get here is a very substantial private-sector decline in prices in 1998, while in the public sector prices were actually rising. It seems that someone in officialdom missed what was happening to the economy and blithely agreed to higher contract prices that contractors had no hope of chiselling out of developers.

Of course, you may argue that many of these public-sector contracts were signed earlier and

the agreed prices could not be changed. Perhaps, but the private sector signs such contracts too and apparently had no difficulty knocking the prices down.

You may also argue that the private-sector figures take in transfer costs of land and buildings plus developers' margins, and these naturally came way down with the financial crisis.

This is true but again it does not entirely explain things. Inflation in construction alone was also lower in the private than in the public sector and, if related prices fell even further in the private sector, well, they still fell and public prices did not.

There is really no getting around it that Government should adopt in practice a greater measure of what it preaches. A little touch of market discipline could work wonders here.

Graphic: mon10gbz