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GUEST POST – Anton Howes on the right incentive

July 13th, 2009 Posted in Uncategorized by

whitehallThe assumption goes that we must allocate budgets to departments according to what they ‘need’. However, this results in those performing the worst being paid the most. The fact that the state is made up of individuals and cliques, often after power, influence and larger budgets, appears to be too often overlooked. The prevailing incentive is therefore for public bodies to allow bad outcomes, presumably up to the point where they would be penalised if the situation were to worsen any further. Despite the presence of excellent public servants, the market incentive to waste and run down a service is likely to be very strong – a point that at least acknowledges that those running government are not always superhuman paragons of virtue.

The seemingly obvious solution is to continue with the existing system, but put in place countervailing incentives to achieve more specific desired outcomes. Sweden for example, after years of fruitless increases in funding aimed at decreasing hospital waiting times, recently set up a fund to pay those authorities able to cut queues below a certain level. The powers of market incentives were very quickly demonstrated, with nearly all local authorities achieving the required cuts within a mere nine months.

However, statesmen set specific targets at their peril – the unintended consequences of these actions could be severe, for example resulting in departments allowing the pursuit of specific quantitative outcomes to let the quality of their work to wane.

A possible solution may be that of achieving budget stasis, capping the amount allocated to departments at a specific amount (dependent on demographic changes, capital expenditure, inflation, etc.), but rewarding all cuts in waste and expenditure with a pound-for-pound increase the following year in the budget. The effect of this would be to prevent future increases in waste and any relaxation of standards by removing the reward for failure with the cap, whilst allowing departments to cut waste easily every year, without the threat of a shrinkage in their budget. This newfound stasis would enable ministers to make overall cuts in expenditure permanent, with the relevant departments no longer having as much incentive to demand that it be increased back to previous levels.

Anton Howes also blogs at Observations of an Aspiring Public Servant, where a longer version of this post is available.

3 Responses to “GUEST POST – Anton Howes on the right incentive”

  1. Mark Littlewood Says:

    Agree with your premise that government departments are hopelessly inefficient. Am not so sure on the solutions though.

    The target culture has been a disaster. If you say everyone in A&E needs to be treated within 4 hours, this is a recipe for people having wait 3hrs59mins irrespective of the severity of their condition.

    The other area where I’m sceptical is “waste”. A quaint idea seems to have taken root that government spending can be categorised into “good stuff” and “waste”. If only government departments lost less money down the back of the sofa and ordered their paperclips from cheaper suppliers, they’d have much more money to spend on pursuing their beneficence…

  2. Anton Says:


    Yes, I point out that the target culture can be bad with “statesmen set specific targets at their peril”.
    I’ve discussed the varying solutions but only settled on one – which is to remove the incentive for government departments to empire-build.
    I’d read the longer version of the post – this one may have been a bit too condensed.

  3. Anton Says:

    Actually, a clarification of that as well:

    The article is concerned with getting rid of the inherent incentive for departments to promote waste, not to reduce waste itself.

    Whatever “waste” is defined as, is up to the departments and presumably the politicians in charge of them – the point is that they have an incentive to accumulate influence, expenditure, budgets and thus to invent newer and newer ways to increase those budgets, even if it’s for nothing useful – the solutions discussed are over the best ways (if any) of removing that malign incentive.