Brian Easton looks at the options for a Government that's hit its borrowing limit but would still like to spend

This is a re-post of an article originally published on pundit.co.nz. It is here with permission.

What can you do when you have hit your borrowing limit and still want to spend?

One option is to cut back on maintenance of your capital – say, to delay repainting the house or keeping the car in tip-top condition. The government does the same. Hence our three water systems leaking, polluting and flooding; hence the deteriorating quality of the state housing and other buildings such as schools and hospitals ....

Another option is not to add to your capital assets – the car is still outside because you can’t afford to build a garage. Government does the same. Roads, schools and hospitals are crowded when they should be extended ...

Or you can borrow sneakily on a credit card or by hire purchase. This is much more limited in the case of the government. The standards set by the 1989 Public Finance Act require reporting all borrowing including that in Public Private Partnerships (PPPs). Part of the reason for the 1989 change was that previous governments – especially Robert Muldoon’s – had been de facto borrowing by giving guarantees to private borrowers which were not reported to Parliament. That failure screwed up the debate of the ‘Think Big’ major projects; had the public known, the resulting decisions would have been different and less costly to the public purse.

But there is a more cunning form of de facto sneaky borrowing which is even more expensive. You can only afford to buy a house an inconvenient distance from the job, so you pay through the nose in the costs of travelling to and from work; you cannot afford to buy a house, so you rent from a landlord who in effect buys it for you and charges you a rent, the total cost of which is higher than if you had purchased the house yourself. The current government seems to be reduced to pursuing such strategies.

For that is the consequence of the Minister of Health’s announcement that he expects Health New Zealand (HNZ) to take out ten-year contracts with private health providers to deliver surgery. This is structural outsourcing, a form of privatisation (although the minister would deny the claim). Since a public hospital could hire the labour inputs directly, the essence of such HNZ ten-year contracts is the government hiring buildings and equipment it cannot supply itself (while giving the private hospital the security of cash flow to be able to borrow to acquire the buildings and equipment).

The minister could have given a direction to HNZ that it install the buildings and equipment for itself. But that would have involved funding public investment and the government judges that it has reached its borrowing limit. It is behaving like a credit-limited person.

At this point I have to deviate from the economics column and discuss whether the outsourcing will compromise the public health system. There are many with far more expertise in the area than this columnist who think that it will. (For instance, Ian Powell argues that ‘increasing the use of private hospitals for elective surgeries will normalise a two-tier system and enable the Government to perpetuate the continuing neglect of public health and further running down public hospitals’.) *

Only an ideologue thinks the private sector will necessarily be more efficient than the public sector (and sufficiently so to pay its higher cost of capital) without evidence. I have not seen many studies and those I have compared delivery where the treatment has been routine rather than complex. Moreover, it is rare for them to allow for the costs of professional training, which public hospitals (mainly) do.

Complexity would appear to be critical. I’ve just read Ivor Popovich’s A Dim Prognosis: Our Health System in Crisis — and A Doctor's View on How to Fix It, which is salutary for somebody who has never worked in a hospital (and also a bloody good read). Admittedly, as he says, he highlights the medical crises and not the more boring bits. Popovich works in intensive care and there are currently no proposals to outsource that sort of care. But any operation can go wrong and as its complexity goes up, most of us would prefer to be near an ICU.

There are two issues an economist might raise. First is that these ten-year contracts amount to PPPs. I leave it to the accountants to decide whether they should appear as a liability in government accounts, but in economic terms they are an indirect borrowing for capital investment as a consequence of the government’s borrowing being restricted. We should consider costs when making outsourcing healthcare decisions, but it is ridiculous that the primary determinant should be some arbitrary borrowing rule.

(At this point it might be useful to reread last week’s column which explains how lenders function and why the government faces a borrowing constraint.)

So I want to suggest a way around the rule acceptable to the lenders, which means it will have to be transparent and sensible.

During the attempt to commercialise the public health system in the early 1990s – one could argue that the minister’s new directive is related to the notions driving that commercialisation – I argued there was a case for separating out the management of hospital buildings from the management of healthcare services. This corporatisation – for they would still be public-owned entities – would have involved the (then) AHBs renting the buildings from the hospital building owners, who would be managing them as commercial properties. The separation was to get AHBs to focus on healthcare delivery, which is quite a different exercise from managing buildings. As a general rule, ask an agency to do two such different tasks and it will do both badly.

This is not as extreme a proposal as it might at first seem. That is already how private hospitals function. The doctors using them lease facilities from the hospitals; they don’t own them. Moreover, it is not too different from the debt proposals of the previous Labour Government’s three waters scheme – that had other weaknesses.

The State Owned Enterprise would borrow for extensions. The resulting debt would appear on the government books. Lenders would be more relaxed about this addition, not only because it would be transparent also because it was set off against tangible development. In effect lenders would accept a higher public debt-to-GDP ratio because in the end it is not the number which matters but whether the debt is well managed.

To be clear, I am not trying to get the government to borrow sneakily. That is inefficient, it distorts decisions and is anti-democratic. But we need a regime which treats the provision of quality healthcare on its merits, undistorted by the need to get around accounting and banking rules.

* I am not ideologically opposed to outsourcing. Almost everyone agrees that the public healthcare system should be outsourcing to primary care. Too often patients are turning up at hospital emergency departments because they have not seen their general practitioners or went to see their GP far too late. That is both inefficient and also compromises the public’s health.

*Brian Easton, an independent scholar, is an economist, social statistician, public policy analyst and historian. He was the Listener economic columnist from 1978 to 2014. This is a re-post of an article originally published on pundit.co.nz. It is here with permission.