Last week’s Comprehensive Spending Review has reignited the debate on how much the government can save by cutting waste. To quote the Review, “Particular focus has been given to reducing welfare costs and wasteful spending.” [emphasis added]

The CSR came soon after the release of the Efficiency Review by Sir Philip Green, which looked more closely at where large amounts of government money are being wasted. The overall conclusion of the report will not surprise many – a lack of communication between departments and a lack of accountability means that money is being thrown at problems, rather than closely managed. The result is widespread inefficiency across government. A couple of examples are illustrative. Green found that some departments were paying over five times more for laptop computers than others. He also estimated that £600-800 million could be saved on telecoms alone.

There is therefore a great deal of potential to make savings. Yet this does not guarantee that significant economies will be made. Waste is arguably inevitable in government activities that lack market incentives. Whereas private enterprises have a financial incentive to minimise waste in order to maximise profits, within government departments the incentives tend to run in the opposite direction. For bureaucrats, larger budgets and extra responsibilities are often associated with higher salaries and increased status.

While it may be possible to improve incentives for civil servants to cut waste – for example, through the use of bonus schemes that offer staff a percentage of the savings made – many of the perverse incentives favouring bureaucratic expansion would remain in place. Accordingly, the most effective way to reduce the amount of waste is to reduce the role of the state by transferring activities currently undertaken by government to the private sector.