Budget 2008: Taxing issues
Matthew Elliott & Corin Taylor 6:29pm
The discussion around Alistair Darling’s first Budget is likely to be dominated by immediate worries, such as non-dom taxation, capital gains tax, the rising budget deficit, Northern Rock, and the impact of the credit crunch on economic growth. These are all issues of paramount concern. But it’s important not to forget the negative longer-term effects of fiscal policy in recent years.
Public spending has surged since 2000. On the OECD numbers, it has increased from 37.5 per cent of GDP in 2000 to 45 per cent last year – an increase unprecedented during a peacetime period of steady economic growth. In 2000, Britain’s public spending as a share of national income was below the OECD average. It is now 4.5 percentage points higher.
This “flash flood” of government spending, to use Reform’s illuminating phrase, has failed to deliver anything like commensurate results. To take three examples:
Firstly, spending on healthcare has risen in real terms (2005-06 prices) from £57.3 billion in 1999-00 to £92.8 billion in 2006-07. But our recent study Wasting Lives: A statistical analysis of NHS performance in a European context since 1981, found that poor NHS performance was resulting in 17,000 deaths per year. Mortality amenable to healthcare was 26.9 per cent higher in the UK than in comparable European countries.
The study also found that Gordon Brown’s additional spending since 1999, despite significantly outpacing spending growth in comparable European countries, has made no discernable difference to the pattern of improving mortality amenable to healthcare.
Secondly, spending on education has risen in real terms from £47 billion in 1999-00 to £69.8 billion in 2006-07. During that time the UK has fallen down international rankings of educational performance. British educational performance ranked far higher in the 2000 edition of the respected OECD PISA international comparison of educational standards than it did in the 2006 survey. In scientific literacy Britain fell from 4th to 14th; in mathematical literacy from 8th to 24th and in reading literacy from 7th to 17th.
Thirdly, real terms spending on law and order has risen from £20.9 billion in 1998-99 to £29.8 billion in 2006-07. Despite this recorded crime rose by 6 per cent over that period. Detection rates fell from 29 per cent to 26 per cent. Two-year prison reconviction rates rose from 58 per cent in 1995 to 65 per cent in 2004 (the most recent data available).
This failure to secure value for money suggests that public service reform will yield better results than crude increases in resources. Putting it mildly, state spending should be restrained in order to prevent further waste. But it is also becoming increasingly clear that controlling spending and cutting taxes will bring significant economic benefits over the medium to long term. This can be seen in a number of ways:
Firstly, the TPA’s Budget report details a number of academic studies which suggest that economies with a smaller share of GDP consumed by government will grow faster. The effect on growth is large enough that spending increases since 2000 might already be costing us around £12 billion a year in lost GDP.
Secondly, the Treasury has consistently overestimated tax revenues as tax rises failed to generate as much revenue as expected under a static analysis. Recent tax rises have had significant negative dynamic effects.
Thirdly, a dynamic model produced for the TaxPayers’ Alliance by the Centre for Economics and Business Research has shown that pre-announced, phased cuts in corporation tax could lead to major increases in economic growth, employment, disposable income, and, over time, tax revenue.
It goes without saying that the TPA would like to see radical reductions in taxation and politicians removed from the management of public services, but we can suggest two politically ‘easy wins’ that could and should be carried out immediately.
Firstly, the planned 2p rise in Fuel Duty in April should be scrapped, which would be a politically astute move. Official data suggests that the population of the most marginal 100 Westminster constituencies in England and Wales are almost 7 per cent more likely to drive to work than those in the least marginal 100 constituencies and travel 13 per cent further to work, while people on middle incomes, often swing voters, spend the most on petrol as a share of their earnings. YouGov polling commissioned by the TaxPayers’ Alliance has also found that 60 per cent of the public consider Fuel Duty unfair against just 17 per cent who think it fair.
Secondly, reducing the size of the state in the medium term will need a number of policies designed to curb the growth in public spending. One of those would be to reduce the size of the Civil Service in a painless (and, compared to the Gershon process, more effective) way. Almost a quarter of the Civil Service will retire in the next ten years. If none of these positions were rehired, taxpayers could eventually save £3.3 billion a year in salary, employer NI and pension costs. A similar policy has been adopted by Nicholas Sarkozy in France. It should not be too difficult to follow suit in Britain.
Both Alistair Darling and George Osborne should be moving in this direction to make a start at reversing the damage from the fiscal ‘flash flood’ of the past decade.
Matthew Elliott is Chief Executive of the TaxPayers’ Alliance [TPA]. Corin Taylor is the TPA’s Research Director.
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Comments
BS
March 10th, 2008 7:26pm'These are all issues of paramount concern'. How can more than one issue be of paramount concern
Damon Lambert
March 10th, 2008 9:08pm"Flashflood" is a great soundbite. Unfortunately, with both Labour and Tories committed to these spending levels for a good few years yet, "New Atlantis" would however be more appropriate
TGF UKIP
March 10th, 2008 9:56pmAll absolutely incontrovertible, but I'm afraid you're wasting your time here Matthew and Corin. The economic analysis of the editorial staff of The Spectator and The Coffee House can best be summed up as Cameron and Osborne right or wrong. As Dave and Boy George have so publicly nailed their colours to not only maintaining the present course of public spending but actually increasing it and as Cameron has promised, in terms, to honour and respect the working practices and traditions of the public sector, your rather radical recipes will not be to the taste of many here. Mind you some of us Coffee House dissenters will be delighted at the fare you offer. Overall, though, sectors of the LibDems may well be more receptive to a radical economic message than the puir, wee, timorous, cowering beastie of a Tory Party.
GS
March 11th, 2008 9:02amWhat if they said, "we'll increase public spending," but they meant realtively? This would be easy to execute: just sack off 50% of all surplus-to-requirement jobs, then spend less, but fractionally so, in order that your spending per head of government employees goes up.
Mike Stallard
March 11th, 2008 9:15am"Public spending has surged since 2000. On the OECD numbers, it has increased from 37.5 per cent of GDP in 2000 to 45 per cent last year – an increase unprecedented during a peacetime period of steady economic growth. In 2000, Britain’s public spending as a share of national income was below the OECD average. It is now 4.5 percentage points higher. "
And what do you think it has been spent on then?
How about unproductive jobs for the client state?
And you think this is going to change?
Water
March 11th, 2008 6:00pmIt’s plain to see the fiscal flood truly hasn’t yielded sufficient change; healthcare statistics (“17,000 deaths per year”) and the results from the OECD PISA survey of the bear’s testament to this fact well enough. Anyone can be forgiven for having grave reservations with regard to Government spending policy with this in mind. Evidently “state spending should be restrained in order to prevent further waste”, but that instantaneously raises doubt as to where the fault actually lays? Increased taxation, it certainly seems, is not the balm to sooth the educational and health related ailments we suffer from as a nation; the TPA dynamic model result certainly seems indicative of this fact. Inability to yield sufficient change is irrefutably an administrative and reciprocally a systemic fault… indeed the system works but to whose advantage? Also (and Elliot and Corin raise a great point here may I add) if it is indeed true that “Almost a quarter of the Civil Service will retire in the next ten years [and] If none of these positions were rehired, taxpayers could eventually save £3.3 billion a year in salary, employer NI and pension costs” then increased taxation again seems to be readily accepted, conditioned reactions for a desensitized populace. But we can’t blame Gordon and the bud of May for we didn’t kick up a fuss with regard to referendum it only seems proper that we are fleeced of what we have left. To put things in context take Truss & Parsons article ‘Budget 2008: Arresting the fiscal flood’ and place it under consideration. It is indeed true that “More than anything, the Pavlovian reflex of committing more public money wherever there is a problem must be discarded” but we must then ask is this failure to procure change a direct causal consequence of the publics inability to question financial fetters? Is it a Pavlovian reflex on the governments’ behalf or of the publics in so readily accepting? With the aforementioned in mind one can’t help but wonder what added ramifications increased taxation bodes with regards to that other than mere fuel prices? It seems Logical to conclude that heavy handed taxation with regard to those of non-dom status could ‘potentially’ hinder foreign investment.
Water
March 11th, 2008 7:02pmWith regard to my last post 4th line down after the words 'survey of the' it's meant to say 'educational standards'.
Water
March 11th, 2008 7:17pmcomputers are funny things you enter data and sometimes it doesn't appear...
Councillor John Ward, Medway
March 11th, 2008 9:24pmAlthough I might be missing something here, I thought that the Conservatives' public spending is planned to match Labour's until 2011 only. Now, as it looks likely that there won't be a General Election until 2010, and the budget for the 2010-2011 financial year will be set by then, it seems to me that this is no actual spending commitment after all. It seems better not to fall into the trap of promising cuts and be (possibly) politically slaughtered for it, and instead to put out the message that they have been doing. All this is assuming that I haven't missed something vital here, which I accept is possible.
Water
March 12th, 2008 10:34amIt is true if you were to revert upon such a promise you would possibly be slaughtered, but were you (as the subject party) to detail that our aim is to make for cuts then you would have merely espoused a particular aim and made no promises and thus remain impervious to polemic acts of slaughter. The point of contention though is of course the lack of yield the with reference to spending.