There are no shortage of challenges facing public-sector leaders today. With all the organizational barriers to change, it is easy to fall into despair. While things may seem bleak, there is good news on the horizon: Despite many institutional obstacles, success is possible.
As the gap between revenue and expenses grows wider, it may seem as if sustainable government is unattainable. Not so. A 2010 report by the Organization for International Cooperation and Development (OECD) called Restoring Fiscal Sustainability: Lessons for the Public Sector highlights that the past 30 years have seen a number of successful fiscal turnarounds and public austerity programs. According to the OECD: "Perhaps the most important lesson of all is that large deficit reduction programmes can be done." For example, the report notes that:
In 1981, Ireland faced a debt-to-GDP ratio of 87 percent and debt service required 8.3 percent of GDP. After an initial attempt at consolidation failed (the economy did not improve and political support was lost), a second try was made later in the decade using a tough austerity programme of cutting spending and widening the tax base accompanied by a sharp devaluation that resulted in a large reduction in the deficit and in the debt-to-GDP ratio.
Likewise, New Zealand was able to turn things around. Facing "persistent deficits that exceeded 6 percent of GDP in the 1980s, New Zealand accumulated an unsustainable level of government debt.... The government reduced regulations -- including wage and price controls -- cut spending by more than 7 percent of GDP, and reduced the number of public employees by half. From 1986 to 2001, the debt-to-GDP ratio was reduced from 72 percent to 30 percent," according to the OECD.
In the 1990s, Finland, Spain, Sweden and Canada all embarked on fiscal reform initiatives that were at least somewhat successful. In some cases, as in Ireland, successful reforms came only after previous failed attempts. In others, such as New Zealand (or, as we are now seeing in Greece), reforms became reality only in the shadow of crisis. While crisis may make reforms easier to implement, waiting for a crisis generally makes the reforms more wrenching.
So, the first lesson is that successful change is possible. Lesson two is that while crisis drives change, you really are better off if you change before you reach a crisis point.
Management guru Peter Drucker contends that successful business executives periodically reexamine the nature and purpose of everything their corporation does by asking two questions: "If we were not already doing this, would we now go into it?" If the answer is yes, they ask the follow-up question: "If we were to start doing this today, how would we do it?"
Drucker's questions get at a simple but profound truth: in some cases what is being done no longer makes sense. In other cases, how it is being done no longer makes sense. In either case, change is called for, and Drucker referred to this as "sloughing off yesterday" and "purposeful abandonment." Innovation brings change, and while the innovation introduces new and improved ways of creating wealth, it also means that old structures become obsolete. Economists sometimes refer to this as the process of "creative destruction," the removal of what exists to make room for what might be -- the organizational equivalent of pruning a bush to make room for new growth. Drucker notes that successful businesses tend to be fanatical at such pruning. This is not because businessmen are so smart, but because businesses that don't do this don't stay in business.
Governments don't go out of business, but they can approach a similar condition. The nation of Greece, the state of California and the city of Vallejo, Calif., have shown us what the end game of unsustainable spending looks like. And while governments may not cease operations, in a democracy the voters can change management.
The current times demand a never-ending drive to create and deliver public value at the lowest possible cost. The good news is that sustainable government is attainable. Revisiting the essential questions of what government does, and how it does it, is part of the process.
This column is adapted in part from our book If We Can Put a Man on the Moon, as well as our new study Red Ink Rising: The Road to Fiscal Sustainability.
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