Politics
Not the General Election
Published 16 April 2001
Instead of the campaign you were expecting, the New Statesman and the Institute for Public Policy Research bring you something better: the debates that the politicians always fudge. This week - public spending
Raise taxes by Peter Robinson
Public spending and taxation are typical battlegrounds at general elections. Labour has spent many years trying to distance itself from its "tax and spend" past; now it proudly boasts about how much it is increasing spending on the core public services. The Conservatives try to persuade people that services have not improved; the Liberal Democrats campaign to spend more.
Lying behind the electoral politics is a fundamental debate over the relative size of the public sector in the UK. The British aspire to public services that are the equal of our European partners. However, it is unclear whether we want to pay the taxes necessary to sustain those services. Faced with these contradictory popular instincts, Labour has raised taxes and is now increasing spending rapidly, while still claiming that this does not amount to old- fashioned tax and spend.
The facts about public spending under Labour are now well known. During the first three years, public spending was, in effect, frozen. In the past year, Labour has attempted to pump up spending by more than 5 per cent in real terms, and promises at least three more years of largesse if re-elected.
By 2003-4, if Labour's plans work out, public spending will total about 41 per cent of GDP, back to where it was in 1996-97. Yet public spending in the European Union averages 47 per cent of GDP. Only in one area - health - does Labour propose to try to match the average spend of our EU partners, while in one other - education - it proposes at least to close the gap. The trouble is that, in both these areas, we are relying on other countries standing still while we catch up with them.
More importantly, the concentration on global totals of spending doesn't produce clarity in policy-making. The government has tried to focus on specific outcomes defined, for example, in terms of better health, higher levels of educational attainment and the elimination of child poverty. Some of these may require higher public spending, some not. The point is to see public spending as a means rather than an end.
Take health. Politicians think they need to spend more to match public expectations for rising levels of service. The media tell us that the NHS is awful compared to health- care systems in other countries. Except it isn't: according to the World Health Organisation, only Japan has a healthcare system associated with significantly better outcomes. Assessed on a range of criteria, the UK's health outcomes cannot really be separated from those in about 20 other countries. And public spending on health in Japan is at the same level as in the UK. Japan illustrates the point that health outcomes are much more than a function of spending on front-line healthcare. Spending more money on housing or social security benefits might be a more effective way of improving health than spending it on the NHS.
Now consider child poverty. If this Labour government succeeds in abolishing child poverty, it will earn its place in history. As a result of the policies already in place, the proportion of children in relative poverty should come down from just over 26 per cent in April 1997 to about 20 per cent. Three-quarters of this reduction will be thanks to increases in child benefit, income support and other means-tested benefits - in other words, good old-fashioned redistribution through tax and spend. This significant achievement will come at a cost of about £5.5bn, or 0.6 per cent of GDP. One can infer from this that eliminating child poverty through further redistribution may cost up to another 2 per cent of GDP. Where is the public debate taking place about the cost of meeting the child poverty pledge?
These examples illustrate the narrowness of the debate in Britain over public spending. Rather than making simplistic spending comparisons with other countries, we need to ask much more sophisticated questions about which achievements in other countries we want to match. If we want to match the low poverty rates of the Scandanavians, this will require redistribution and tax and spend in spades. If we want better health outcomes, spending on the NHS may not always be the best way of achieving them. If we want public transport as good as other countries have, we may need to reverse the trend that has seen public spending on transport nearly halve as a proportion of GDP over a decade, a trend that has so far continued under Labour.
In other words, we should make tough choices about the trade-offs between different objectives. Which is more important: abolishing child poverty, improving the health service, or improving public transport? How do we link spending pledges in a more sophisticated way with the actual outcomes we want? These are the debates we should be having.
Peter Robinson is senior economist at the IPPR
Slash taxes by Simon Heffer
People suppose economic liberals dislike public spending because they callously oppose services for the poor, or greedily resent paying income tax, or a lethal combination of both. In fact, the usual objection is that the state has a dismal record of extracting the best value from the money spent. Public spending retards growth. It takes money out of the productive sectors of the economy, where it might be invested and used to expand employment, and pumps it into the unproductive sectors, where it is often used to subsidise inefficient management systems.
Such considerations underpinned the dismay many Conservatives felt at the spending plans of Michael Portillo, the shadow chancellor. Both he and his predecessor, Francis Maude, took pride in asserting that they would match Labour's spending on the vital public services. The implication was that they regard public spending as an inherent good, which few other Tories do these days. The money that Portillo promises to cut out of the Budget, in the remote event of his becoming chancellor later this year, amounts to just £8bn. That is less than 2 per cent of a public purse of more than £400bn. As the Tories' economic policy stands, they might as well give up and go home. While they believe they must spend whatever Gordon Brown does on schools and hospitals, they fight with both hands tied behind their backs.
There is a fundamental ideological point that the state has no right to take such a proportion of the national wealth - more than 37 per cent - in taxes. Such expropriation is illiberal. The point about spending is not quantity, but quality. Instead of promising more money on schools and hospitals, the Tories should seek to extract better value for the money that is spent already. Most public spending goes on wages and salaries: in the NHS, it is something like 70 per cent. Two obvious ways of improving value for money therefore present themselves.
The first is to contract out management of virtually all public services to the private sector. For example, private health firms could run hospitals while maintaining a service free at point of use. Trade unions have always objected to this because it would involve job losses, proving the point made by liberal critics that state-run concerns exist mainly for the benefit of their employees. The firms to whom the work was contracted out would pay dividends, corporation and income taxes, thus assisting national economic growth, and no one would be denied a service.
The second is for a national audit of public sector services to examine which jobs are really necessary, especially in local government. The chief executive of a (Conservative-controlled) county council recently boasted to me that his council had opened an office in Brussels to attract investment (to a county bursting at the seams and with virtually no unemployment). He could not, however, afford to pay salaries high enough to attract enough teachers to the county, because of property prices. The solution was simple, though he and his masters clearly did not want to see it. Too much public spending is used to advance the political parties. It should provide necessities, but too often it provides indulgences. As a result, vital services - our schools, care of the sick and the elderly - have less cash than they deserve.
When Labour has supposedly buried socialism, there can be no ideological objection to the private sector providing the necessary services. Empire-building in local government on the backs of the taxpayers simply has to stop. Too large a public purse has encouraged too much government, and too many layers of government. The multiplication of overpaid and often unelected posts at the pinnacle of government is now being mirrored all the way down. The taxes that are being taken to subsidise this could be left in the pockets of the workforce and the coffers of companies, and used to create demand and employment in the private sector.
When almost everyone thinks he or she is middle class, there is no call for cradle-to-grave welfarism. Indeed, to concentrate aid on those who really need it, those who do not should be denied the state's help. Equally, the middle classes need to be encouraged in their independence by being returned the money not just to pay for pensions and, possibly, healthcare, but to insure against unemployment and time lost at work through sickness. As for the non-personal public services, four years of pumping state money into them have resulted in (for example) a sclerotic road transport system and a collapsed state-subsidised rail system.
Public spending limits growth. It restricts the freedom of the individual. The state is abominable at running things: look at the Dome if you have any doubts about recent form. Better to let those who must survive in the competitive world of the private sector take the risks and make the decisions in tandem with liberated taxpayers. It is just a pity that the present Tory party has no intention of doing so, and may even end up being outflanked by new Labour in economic and social radicalism.
Simon Heffer is a Daily Mail columnist
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