Chart in focus
Government efficiency and the public debt ratio

January 5, 2012

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a”How do you feel about efficiency? Tell me, pray.” This slightly altered key question asked by Gretchen in Johann Wolfgang von Goethe's tragedy “Faust” is becoming increasingly important in the current debate about government debt in the euro area. In addition to national austerity packages there are increasing calls for structural reforms aimed at greater government efficiency. There is a need for improvement in this area especially in the southern European countries.

In its Global Competitiveness Report 2011/12, the World Economic Forum ranked governments according to their efficiency. Among other things, the indicator comprises aspects such as wastefulness of government spending, burden of government regulation, efficiency of legal framework and transparency of government policymaking. Correlation analysis of the indicators for selected euro-area countries with the public debt ratio, which reflects total government debt in relation to gross domestic product, reveals the following picture: countries whose administrative efficiency is considered to be low usually have a higher debt ratio than those with efficient administration. In Italy, Greece and Portugal, government efficiency is not looking good. Government debt is another cause for concern. Finland, the Netherlands and Germany, by contrast, all obtained good marks for government efficiency and debt.

So, structurally sound governments are in a better position to achieve a sustainable fiscal balance than those with inefficient structures, as the latter fail to fully implement the necessary reforms. Higher outlays resulting from administrative overlaps, inefficient work procedures and a lack of internal and external communication are pushing up debt in individual countries. What is more, slow or even massively delayed government work can also be the result of inefficiency if human, administrative and resources are not put to proper use.

The key question asked at the outset is thus more pressing than ever and should not be answered evasively, in Faustian fashion, by the euro-area countries but should instead lead to structural reforms aimed at increasing efficiency.

 



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