7.1 Public regulation and bureaucracy

7.1

Public regulation and bureaucracy

7.1.1 RELATIONSHIP BETWEEN BUREAUCRACY AND GROWTH

The quality of public administration, via its effects controlling and influencing the economy, is a fundamental competit

iveness factor. In order to ensure the efficient functioning of a country's society and economy and satisfy their needs, it is essential to maintain a proper public administration and bureaucracy. This is partially due to this fact that in the welfare economies the state is the largest employer. After World War II, in the developed countries the number of public administration employees dynamically rose; for example, in France the ratio of bureaucracy within the total number of people in employment doubled in the period 1955-1990. The rising trend broke in the mid-1980s in Europe. Despite the consolidation thereafter, the state continues to be one of the key employers in the economy (Rothenbacher, 1997).

Essentially, three criteria can be examined to assess the impact exerted by public administration on the economy.

Firstly, the public administration headcount, which absorbs labour force in the economy and thus also affects private sector employment. Secondly, the cost of maintaining the public administration, which is obviously covered by the tax burdens imposed on the private sector. Thirdly, the quality of public administration, the efficiency and growth-friendly nature of regulation, which are much more difficult to quantify than the first two criteria. The efficiency of public administration can be enhanced by rationalising the activities, eliminating redundancies and strengthening digitalisation. This releases resources for the private sector and may also increase the budget's room for manoeuvre. The government may spend the fiscal saving thus realised on: 1) tax cuts; 2) financing productive public sector spending; 3) wage increase within the sector; and 4) reducing the deficit and debt.

The correlation between efficient public administration and economic growth is also supported by empirical analyses.

Evans and Rauch (1999) identified an explicit positive correlation between public administration and economic growth, naming the Four Asian Tigers as one of the most important examples. The successful economic policy reforms in these Asian countries were built on centralisation; planning and coordination was performed by councils and committees, vested with even stronger competences than the ministries. Later analyses identified impacts varying by development level (Lovett, 2011). The quality of bureaucracy reflects higher variance among the lesser developed countries than in those with advanced economies, and thus a stronger growth effect can be identified in the first group.

In addition to the public administration headcount, as a quantitative factor, it is of key importance that the government should also satisfy the requirements of public

administration based on the qualitative criteria. A public administration of adequate size alone is not a sufficient condition; it must have a highly qualified team of specialists, able to efficiently manage the tasks they are commissioned with.

The improvement of efficiency is complicated by the fact that value added cannot be measured in public administration in the same way as in the case of businesses.

Statistics measure the public administration's value added primarily from the input side, due to the fact that output cannot be measured and it also has no market price. However, measurement of the state's efficiency has already commenced in certain countries and there are still plenty of opportunities in store. In this area, the United Kingdom has the greatest experience; the Office for National Statistics (ONS, 2018) gives an account of the public sector's efficiency annually in its report. The limitations of measuring efficiency at an aggregated level increase the role of individual and management responsibility.

High-quality public administration is conditional upon a wage level comparable with the private sector, which is hindered both by the fiscal barrier and the possibility of

measuring performance. The condition of wage increases could be productivity similar to that in the private sector, which, however, cannot be measured due to the aforementioned limitations. Staff management is an approach frequently applied in bureaucracy, which yields no efficient result. The managers are interested in raising the headcount reporting to them and efficiency considerations are of secondary importance. A more modern and expedient approach is wage bill management: if fewer but more highly skilled officials are able to carry out the tasks, the saving realised on the headcount may be used for wage increases. This may help reward high performance and stimulates the staff to achieve it.

Competitiveness rankings reflect bureaucracy indirectly, occasionally with contradicting conclusions, due to the challenges inherent in the possibility of performance measurement. The institutions that compiled the key competitiveness surveys (World Bank, World Economic

Forum) did not undertake to measure the efficiency of public administration directly. The World Bank's Doing Business survey, which is based on objective indicators the most, places the emphasis on the state regulatory environment (e.g. starting a business, getting electricity, registering property), while the publication of the World Economic Forum focuses on the institutional system. Due to the methodological differences and the measurability obstacles, the conclusions also contradict to each other in certain cases. For example, based on the latest Doing Business survey, the regulatory environment is adequate in Hungary, while the World Economic Forum is of the opinion that the institutional system should be improved.

7.1.2 SIZE OF PUBLIC ADMINISTRATION IN HUNGARY

In an EU comparison, the Hungarian state spends relatively more on maintaining public administration, although some

decline has been observed since 2014. One of the key items within government consumption expenditures is related to the maintenance of public administration. In Hungary, in the past roughly one decade the rate of public administration expenditures, adjusted for debt servicing transactions (among other things), fluctuated between 4.5 and 5.5 percent of GDP, with wages accounting for a major part of this. In the two years after 2014, expenditures as a percentage of GDP fell by 1 percentage point. Despite the improving trend, by international standards the Hungarian state still spends more on public administration than Austria and it also exceeds the average of the EU or the region. In Austria, the GDP-proportionate expenditure is 3.5 percent, while the average of both the EU and the Visegrád region was 2.9 percent, based on which fiscal saving of almost 1.5 percent of GDP would be feasible.

Chart 7-1: State public administration expenditures as a percentage of GDP (2016)

As a percentage of GDP 6

5

4

3

2

1

0

d n a l n i F e c e e r G s u r yp C a ti a o r C y r a g n u H ta l a M n e wed S e c n a r F um i g l e B

Source: Eurostat.

a i r t s u A l a g u t r o P y l a t I a i n o t s E any m r e G a i k v a o l S c i l b u p e R h c e z C e g a r ve a U E k r a m n e D e g a r ave 3 V a i n v e o l S a i tv a L n i a p S and l o P a i n a u h t i L a i n a m o R ds n a l r e eth N a r i a g l Bu m o d g n i K ted i Un d n a l e r I

The large size, by international standards, of Hungarian bureaucracy is also evidenced by the headcount data.

According to data from the Labour Force Survey (LFS), the number of public administration employees in Hungary is roughly 300,000. As a proportion of the total number of persons in employment, 6.8 percent work in public administration in Hungary, while the EU average is 5.8 percent and the Austrian average is 5.7 percent. Based on the international comparison, the size of the Hungarian bureaucracy could be reduced. Employment corresponding to the EU average would represent a bureaucracy smaller by 35,000–40,000 persons. Among other things, this may also serve as a catalyst to achieve the target – described in more detail in the Labour Market section – i.e. a higher employment ratio in the private sector.

Chart 7-2: Ratio of public administration employees (2017)

8 7 6 5 4 3 2 1 0

Percent

um i g l e B e c n a r F y r a g n u H e c e e r G a ti a o r C n e wed S a i k v a o l S y n a m r e G a i v t a L e g a r e av 3 V c i l b u ep R h c e z C n i a p S e g a r ve a U E dom g n i K ted i Un a i r a g l Bu nd a l o P a i r t s u A ta l a M a i n v e o l S s u r yp C ds n a l r e eth N l a g u t r o P a i thuan i L a i n o t s E r k a m n e D y l a t I d n a l n i F nd a l e r I a i n a m Ro

Source: Eurostat.

The shortfall in the wages of state administration employees compared to the average of the national economy is the highest in Hungary among the European countries. In parallel with the dynamic economic growth and the tightening labour market, in the past years Hungary was characterised by strong wage growth, from which the public administration benefited to a lesser degree. The budget's greater room for manoeuvre resulting from the potential downsizing of the bureaucracy may be a good opportunity for wage increases. A wage increase in the sector may raise the positive effects of public administration reforms, if in parallel with the rising wages the productivity of the more highly qualified public labour force also increases. In Hungary, in 2017 a public administration employee received 92 percent of the wage of an average employee, while the average of the EU member states was 108 percent. In the past years, the strong national economy wage growth was also accompanied by a wage alignment in public administration, but the high wage premium of the private sector remained. Starting from 2016, a wage increase was implemented in the government offices and at the tax