Smarter, Not Just Smaller: Holistic Solutions to Government Spending Inefficiency

 

Smarter, Not Just Smaller: Holistic Solutions to Government Spending Inefficiency

The debate over government spending often simplifies into a binary choice: more spending or less spending. As our research has shown, the problem isn’t just the amount of money spent, but how it’s spent. The observation that government spending on goods and services is more expensive is well-documented, with studies pointing to a "factor of X" ranging from cost overruns on major projects to millions in wasted software licenses. The root causes, from Milton Friedman’s "spending other people’s money on others" to bureaucratic “red tape,” highlight a fundamental lack of incentive for efficiency. The question then becomes, will simply a "small government" solve the issue? The answer is no, not entirely.

---

The Incompleteness of the "Small Government" Argument

While reducing the size and scope of government can certainly eliminate some areas of waste, it is an incomplete solution. A small government, by its nature, can also underinvest in essential public goods like infrastructure, education, and national defense, which have a high rate of return for the economy and society. The core issue is systemic, not merely one of scale. Even a small government can suffer from the same bureaucratic inefficiencies, lack of competition in bidding, and political interference that plague larger ones.

The real solution lies not in making government smaller, but in making it smarter. This requires a holistic approach that targets the root causes of inefficiency, regardless of a government’s size or political structure.

---

Universal Solutions for All Governments

These solutions address the fundamental breakdowns in a government's procurement and management processes and can be applied in both democratic and authoritative systems.

1. Data-Driven Transparency and Accountability: The key to solving the problem of misaligned incentives is shining a light on the process. Implementing open contracting data standards allows for public tracking of every stage of a procurement contract, from bidding to completion.¹ This level of transparency makes it easier to spot price gouging and collusion, forcing actors to act more ethically. Chile’s experience with open procurement, which led to a 28% reduction in IT costs, is a testament to this approach.

2. Modernizing Bureaucracy and Talent: Government inefficiency often stems from outdated, rigid processes and a "brain drain" of skilled talent to the private sector.²

   • Streamline Processes: Reduce the layers of approval and "red tape" that stall projects and inflate costs.³ Adopt agile, modular approaches for technology and infrastructure projects to deliver value in smaller, more efficient increments.⁴

   • Cultivate Expertise: Invest in training and professional development for public servants, particularly in procurement and project management. Offer competitive compensation and career paths that reward efficiency and innovation, not just seniority.

3. Performance-Based Contracts: Move away from fixed-price contracts that reward completion regardless of quality. Instead, use contracts that tie payments to measurable performance outcomes and key performance indicators (KPIs), creating a shared incentive for success.⁵

---

Tailored Solutions for Different Government Types

While the above solutions apply universally, the path to implementing them differs greatly.

For Democratic Governments

Democratic systems, with their emphasis on checks and balances, should leverage these strengths to combat waste.

1. Legislative and Regulatory Reform: Pass laws that simplify and modernize the procurement process, making it less vulnerable to lobbying and special interests (addressing the public choice theory).⁶Establish independent, non-partisan oversight bodies with the authority to audit and investigate spending.

2. Empowering Citizen Oversight: Foster a culture where government is held accountable by the public. Support investigative journalism, watchdog organizations, and open data initiatives that allow citizens to become part of the oversight process.

3. Strategic Use of Public-Private Partnerships (P3s): P3s are not a magic bullet, but when used with a rigorous Value for Money (VfM) analysis, they can transfer risk and leverage private sector expertise.⁷The public sector's role shifts from a direct builder to a smart partner, focused on securing the best overall value, not just the lowest initial cost.

For Authoritarian Governments

In systems where public or legislative oversight is limited, the impetus for change must come from the top down.

1. Centralized Accountability and Anti-Corruption: Create a powerful, centralized anti-corruption agency with a direct line of authority to the highest levels of government. This body must have the power to investigate and prosecute officials who engage in corrupt or wasteful spending, with the full backing of the state.

2. Mandated Efficiency Metrics: Implement mandatory performance metrics for all government agencies. Leaders should be held accountable for meeting specific, quantifiable efficiency goals, with rewards and punishments tied directly to outcomes. This creates an internal incentive for efficiency that can work even without external oversight.

3. Limited Openness as a Control Mechanism: While full democratic transparency may not be an option, a government can implement limited open contracting as an internal control mechanism. By making a portion of procurement data available, the central government can monitor for fraud and waste among lower-level officials without ceding full control.

---

The problem of government spending inefficiency is not a simple one with a simple solution. It is a complex issue rooted in misaligned incentives and systemic failures. While a small government may be a political ideal for some, the practical solution lies in building a smarter government. By combining universal principles of transparency and modernization with tailored, system-specific solutions, it is possible to transform public spending from a source of waste into a powerful engine for national progress and value.

The Welfare Fragility Trap: Why Lack of Skin in the Game Threatens National Resilience

 

The Welfare Fragility Trap: Why Lack of Skin in the Game Threatens National Resilience

The current design of the UK's welfare system, where unemployment and disability benefits can significantly exceed the after-tax income of minimum wage workers, presents a clear case study in unsustainability and unfairness when viewed through the lens of Nassim Nicholas Taleb's concepts of antifragility and skin in the game. This system, if left unaddressed, risks creating a fragile economy and an inequitable society.

Unsustainability and Unfairness: A Talebian Perspective

Lack of "Skin in the Game": Taleb's principle of "skin in the game" argues that those who make decisions or benefit from a system should also bear the consequences of their actions. In this context:

• For Beneficiaries: When individuals can receive more from benefits than from working a minimum wage job, the "skin in the game" for engaging in productive labor is diminished or even reversed. There's little financial incentive, and in some cases, a disincentive, to participate in the workforce. This creates a moral hazard, where the cost of not working is externalized onto the taxpayers, fostering a cycle of dependency.

• For Policymakers: If political decisions to expand welfare provisions are not directly tied to the fiscal consequences for the decision-makers themselves, there's a lack of "skin in the game" that can lead to irresponsible public spending. The long-term "welfare dependency time bomb" and warnings from the Office for Budget Responsibility (OBR) underscore this detachment between policy decisions and their ultimate financial burden on the nation.

Fragility vs. Antifragility: An antifragile system is one that not only withstands shocks but actually benefits and grows stronger from them. A fragile system, conversely, is harmed by volatility and stress. The current welfare system exhibits significant fragility:

• Economic Fragility: By disincentivizing work and increasing reliance on state provisions (evidenced by the surge in disability claims, particularly for mental health conditions), the system makes the overall economy more fragile. It reduces the productive workforce, increases public debt (projected to hit £100 billion by 2030), and diverts resources that could be invested in wealth creation. An antifragile economy would naturally encourage adaptation, self-reliance, and productive engagement, thriving on the "stress" of competition and necessity.

• Societal Fragility: When a significant portion of the population finds it more advantageous to rely on benefits than to work, it erodes the social contract and fosters a sense of unfairness among working citizens who bear the tax burden. This can lead to social division and a weakening of community resilience, rather than building a society that benefits from challenges.

• Individual Fragility: While well-intentioned, a system that provides extensive benefits for conditions like mild anxiety, depression, or ADHD without a strong emphasis on active recovery or integration back into work can inadvertently create individual fragility. It may remove the impetus for individuals to develop resilience and coping mechanisms, making them more dependent on external support rather than empowering them to overcome challenges and thrive.

Unsustainability: The escalating monthly applications for disability benefits (from 13,000 to 34,000 since the pandemic), the tripling of claims for anxiety and depression, and the projection of £100 billion in health and disability welfare spending by 2030 (equivalent to the income tax of 9 million workers) clearly demonstrate the system's financial unsustainability. This trajectory places an unbearable and unfair burden on current and future taxpayers.

Unfairness: It is fundamentally unfair for individuals who contribute their labor and pay taxes to earn less than those who rely solely on state benefits. This disparity undermines the value of work, creates resentment, and distorts the incentive structure of the economy.

Urgent Fixes to Restore Antifragility and Skin in the Game

To address this "welfare dependency time bomb" and send a clear message, urgent reforms are necessary to reintegrate "skin in the game" and foster antifragility:

1. Re-evaluate Benefit Eligibility for Mild Conditions: As the report suggests, remove benefits for mild anxiety, depression, or ADHD, aiming to save £7.4 billion annually. This introduces a necessary element of "skin in the game" for these individuals to seek active recovery and re-engagement, rather than passive reliance.

2. Re-invest in Proactive Mental Health Support: Crucially, re-invest a significant portion of the savings (e.g., £1 billion as suggested) into frontline NHS mental health services, including talking therapies and community support. This shifts the focus from passive financial aid to active support that builds individual resilience and capability, thereby fostering antifragility.

3. Reform Work Incentives: Ensure that working, even at minimum wage, always results in a higher net income than relying on benefits. This re-establishes the fundamental "skin in the game" of employment and makes work financially attractive.

4. Strengthen Employment Support: Implement robust programs that actively help beneficiaries transition back into work, providing training, job placement assistance, and mentorship. This empowers individuals to become antifragile by gaining skills and independence.

5. Accountability for Policymakers: Introduce mechanisms that tie political decisions regarding welfare spending more directly to fiscal responsibility, encouraging politicians to have "skin in the game" through transparent budgeting and long-term economic planning.

Sending the Right Message to Citizens and Politicians

The messaging around these reforms is critical to ensuring public understanding and political will:

• To Citizens: Emphasize that these reforms are not about cutting support but about strengthening the nation and building a fairer, more resilient society. Highlight that the goal is to empower individuals to thrive independently, protect the value of work, and ensure the long-term sustainability of public services for everyone. Frame it as a necessary adjustment to secure a prosperous future for all, ensuring fairness for those who work hard and contribute.

• To Politicians: Stress the fiscal imperative and the national security aspect of addressing the "welfare dependency time bomb." Argue that these reforms represent a proactive step to avoid a future economic crisis, strengthen the UK's financial stability (as warned by the OBR), and ensure intergenerational fairness. Frame it as an opportunity to demonstrate strong, responsible leadership that prioritizes the country's long-term health over short-term political expediency. The message should be: "Making this right is the best option for the country, building a more robust and equitable foundation for future generations."