Greece crisis: Good government can be learned – let’s start with our neighbours

Fewer workers to pay more retirees’ pensions is a potential catastrophe facing much  of continental Europe

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This is not the way to do things. Whatever eventually emerges from the Greek saga this week, the chaos is not acceptable. Some people will shrug and say that the high drama of these late-night negotiations is part and parcel of the democratic process and that if people lose money as a result of economic and financial disruption, that is just collateral damage.

It may even be that by pushing things to the wire Greece will get what appears to be a better deal in the short-run from Europe than it otherwise might have done. But the long-term damage will be massive, whatever the outcome of the current round of talks. For we all know this will not be the end of the matter.

One of the things highlighted is that governments have to do better. The Greek government has underperformed in many areas: it is overstaffed, has an inefficient tax gathering system, and has, I am afraid, been given over to corruption. But all governments underperform, and we accept as normal that they should, for example, be bad at running big IT projects, or wasteful in defence procurement. We accept mediocrity, and there is not much we can do about it because in many areas governments are monopoly suppliers of the service.

To say that is not to suggest that the private sector is always better: it was governments who had to rescue the banks. Rather it is to note that while the European negotiators are rightly pushing Greece to run its affairs better, other developed countries in Europe and beyond are by no means star performers.

The argument goes further. The developed world was struggling to improve the living standards of its people even before the last recession. The great productivity machine that pushed real earnings up by 2 per cent or more a year seemed to be slowing down and the recession made matters much worse. We know we have a problem in the UK, but actually so does everyone else.

This will be one of the huge challenges for governments across the developed world for the foreseeable future. They have to deliver, as far as they can, macro-economic stability. They have to find better ways to lean against the boom-and-bust cycle. Greece is only an extreme example of failure here, but none of us – with the partial exception of Germany – has done well. What is interesting now is how governments and central banks are trying to learn from their errors and change institutional structures to enable, or at least nudge them, to do better next time. Our own Office for Budget Responsibility and this new legislation for a balanced budget are efforts in this direction.

Quite aside from wiser macro-economic policy is more efficient management of government activities. In very round numbers, government accounts for 40 per cent of GDP in most developed countries. That divides roughly into two halves. There is the 20 per cent for the services governments provide themselves, including defence, law and order, directly provided health care, schools and so on. And the other 20 per cent is what is loosely dubbed welfare – pensions, social security, unemployment pay, etc – where the government takes in money and then recycles it, sometimes to the same people at different stages of their life.

So governments have 40 per cent of the economy to run. That is huge. It is harder to lift the efficiency of the welfare part because you are only doing the admin. You need to make sure the money goes to the “right” people, and one aspect of the reforms being pushed on Greece is to do something more on its pension payments. These have been slashed by previous governments and understandably there is huge resistance to doing more. Things can be done to control welfare spending, for example by legislating for later retirement or improving personal pension provision, but to do it fairly takes a generation. To slash pensions that people have paid into for years is deeply unfair, and that is what Greece has been doing.

The big lesson from Greece is that welfare reform is something developed nations need to tackle if the living standards of the next generation are not to be pushed down by the demands of the previous one. The UK is lucky in having the prospect of an expanding workforce for the next 30 years or so. Much of Europe does not. Some projections suggest the German workforce will shrink by more than a quarter by 2050. Fewer workers to pay more retirees’ pensions is a potential catastrophe facing much of continental Europe.

The other 20 per cent of public spending requires a different sort of reform. Here the task is greater efficiency through new technologies. These are not a few big decisions about the retirement age, but lots of small ones about, for example, getting rid of paper driving licences. European countries can learn from each other. If Greece is at one end of the scale (and friends there have horrendous stories about traipsing from one office to another staffed by surly state employees), Estonia is at the other. It is the most advanced in the world at enabling citizens to deal with government online. You can apparently get a tax refund within two days if you have overpaid your tax – and income tax, by the way, is a flat 21 per cent.

It is easier if you have only 1.3 million people to deal with, but I gather that one of the unsung innovations of its coalition has been in applying IT to trim admin costs. It helps of course if you have simple tax and benefit systems to manage and we don’t. But that is a different issue, though also another area where the potential efficiency gains are massive.

To return to our opening point, it is fascinating that within Europe there are such glaring examples of how not to do things, but also examples of how to do government rather well.