WASTE – especially government waste – is a watchword of the right. If only we could reduce or remove government waste, everything would be great. It's one of those statements the right uses to such good effect.
Yeah, that makes sense. No one likes waste. Waste is bad and should be removed wherever possible. However, as we often mention in this newsletter, it is more complex.
When all governments come to power, they search for the silver bullet, the quick fix, and "removing waste" is guaranteed to be at the top of their list.
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Looking back to Thatcher, removing waste was a reason that privatisation was so popular. The idea of a less wasteful train service, phone company, gas, and electricity supply struck a chord with most people.
Blair’s Labour government was a waste watcher, too. The rationale behind Private Finance Initiatives was waste-driven. It was underpinned by the theoretical idea that the private sector would be less wasteful.
The new Labour administration is also watching waste. Here is a typical example: A press release from the Labour Government last month suggested a Major crackdown on NHS waste.
“Doing so will create thousands more UK jobs and help transform the country into a life sciences superpower,” the release said.
Labour has not dropped the Conservatives' hyperbole. However, their approach is sound.
When governments plan to cut waste to enable them to spend that money more wisely – for example, as Labour suggests by boosting front-line services – cutting that waste falls into the replacement bucket. No money is being withdrawn; it is simply spent better.
However, the right sees waste, especially government waste, as evil. The idea is not to reallocate the spending but to remove it entirely: to not spend it in the first place.
As you probably know, the USA has a new "government waste Czar" who seeks to remove government waste. Apparently, about 30% of government spending is waste ($2 trillion)! And the plan is to remove that from upcoming spending plans.
This is strikingly similar to the plan in Argentina that has decimated essential public services for millions of Argentinians over the last twelve months. Their President, Javier Milei, is a thumbs-up-photo-shoot-friend of Musk. Those two and Trump are peas in a very strange-looking pod.
As you can see below, the USA is not a big spender. Note that this chart does not list all higher spending OECD countries.
Source: OECD
A two trillion reduction would see the US sit just above Chile.
All too predictably, the right in the UK is clinging on to the coattails. Get prepared for the great waste debate in 2025.
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The debate (like much of the economic commentary in the UK) will miss one crucial aspect. Every pound spent by the central government is matched in the non-government sector $ for $ in the US and £ for £ in the UK.
When the government reduces waste by cutting overall spending, it removes that money from the nongovernment sector. In other words, it takes that income from you. This is where the concept of sectoral balances comes into play.
Source: Modern Money Lab
Using the UK as an example, as you can see above, the government deficit is matched by the surplus of "PB", which is the nongovernment sector, and "FB", which is the foreign sector. Every £ the government spends in the UK enters the nongovernment sector.
When you use this frame, waste and, more generally, budget deficits and debt look very different.
Can the US, UK, and Scottish governments spend their budgets better? Sure. However, the argument is rarely about spending it better.
It is about removing as much government spending as possible, almost exclusively from services like health, education, and support for the most vulnerable in society.
And when that happens, the whole thing is one giant waste of time.
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