Today sees the Institute of Economic Affairs publish its own version of the Comprehensive Spending Review. The research report – Sharper Axes, Lower Taxes: Big Steps to a Smaller State – calls for a radical downsizing of the public sector and sketches out the colossal tax cuts which would become possible. Accompanying opinion poll research, conducted by ComRes, shows overwhelming public support for such a strategy.
For all the sound and fury surrounding the coalition’s fiscal retrenchment, its proposals are actually amazingly modest. In real terms, public spending will fall by a mere 3% or so between now and the next election. For every pound the state was spending when Liberal Democrats took to their ministerial offices, it will be spending about 97p by 2015. The public sector will still account for around 40% of the overall economy. The coalition intends to continue to spend more money than it raises in tax receipts and – although the budget deficit will fall – the overall national debt will rise by several hundred billion pounds. The next generation – those who cannot vote yet and even those who have yet to be born – will end up paying the bill for our continuing largesse today.
The IEA calls for the coalition to go far further and to seek to reduce the public sector to around 30% of GDP by reducing government spending by an additional £215bn. In real terms, this would mean public spending reverting to the level it was at in 2001 when Tony Blair’s government sought re-election for the first time. There would be dramatic cuts in health spending (£44bn) as well as education (£15bn), pensions (£15bn) and defence (£17bn) – but there would be ample left to cater for the needs of the poor and underprivileged.
The corresponding tax cuts which become possible are truly spectacular. In broad terms, income tax could be cut to a flat rate of around 15% and the income tax threshold raised to £12,000. VAT could theoretically be halved to 10% (although the EU would prohibit such a move). Inheritance tax and stamp duty could be done away with altogether. If this isn’t the precise sort of tax cuts package you’d like, feel free to pick another on the same sort of scale. Averaged out, the savings amount to £7,500 per household.
The opinion poll research shows that such a strategy could be hugely popular amongst the electorate. 55% of the public believe the government should aim to cut spending to 35% or less. 29% broadly favour the coalition’s strategy – the public sector being in the 35%-45% of GDP range. A meagre 14% support a level of government spending at 45% or above. Young people are particularly supportive of a smaller public sector, with 68% of 18-34 year olds supporting the state being reduced to 35% or less. Remarkably, support is very consistent amongst supporters of all three main political parties.
Given a straight choice between the coalition’s plan and the IEA’s, a full 70% of the electorate support the latter.
The last decade has witnessed an explosion in the amount of money spent by the government. The results have been disappointing to say the least. Productivity in the public sector has fallen. Taxes have increased. Debt has soared.
For those who have tended to recoil from making savings in the public sector, the question needs to be asked when would the size of government be too great to bear? 55% of GDP? 60%? More?
A smaller state needn’t be accompanied by a disregard for the poor or by a mean-spirited culture. Far from it. The barbarians weren’t at the gates in 2001 and reducing spending to those sort of levels would be a dramatic step towards liberating individual men and women. If anyone can find the political courage to advocate such a strategy, they may also find it’s a popular one.
Mark Littlewood is Director General of the Institute of Economic Affairs.