Now all three major parties have launched their manifestos it’s clear that no one is being honest about the true state of the country’s finances. The Conservative manifesto is scarcely more ambitious than plans published by the government or the Liberal Democrats. The timing and magnitude of proposed deficit cuts are slightly different, but taxes will rise significantly whoever wins on May 6th. This comes after 10 years of huge increases in discretionary government spending both in real terms and relative to national income, with tax rises following in their wake.
In a briefing paper issued earlier this week, we show that spending cuts of £167bn would be necessary to prevent the tax burden from rising in real terms over the next five years. This should be the minimum objective – spending cuts of about 25% across the board. Now is the time for radical action. In one Parliament we must reduce taxes dramatically, simplify the tax system and pull the poor out of tax. To do this requires a reduction in the proportion of government spending in national income to well below the levels that existed in 1997.
It seems, once again, that we have returned to the “socialist ratchet” described by the late Sir Keith Joseph. The greatest ambitions of the Conservatives are to reduce the growth of the state or, at best, roll back some of the advances of government power made by Gordon Brown in the last 12 years.
This is deeply worrying. A Labour government was elected in 1997 that has increased the role of government in economic life dramatically. It may then be followed by a Conservative government that is content with accepting that much of that ground cannot be reclaimed.
The fiscal problems the UK faces cannot just be communicated by reference to the very high level of government spending as a proportion of national income. We also have an appallingly complex tax system and a tax system that penalises the poor when they start to earn relatively small amounts of income. As the pressure group Care has shown, families in the UK also have amongst the highest tax burdens in the OECD.
The issues are interconnected. We need cuts: big cuts. Past history suggests that small spending cuts will be delivered in a way that produces the maximum political pain. Cuts are administered by incumbent bureaucrats. It is well known that bureaucrats implement them in a way that minimises the harm to themselves whilst maximising the publicity impact. Important services are cut first; cutting waste is an afterthought. We are familiar with this not just from “Yes Minister” – but from our experience of spending cuts in the Thatcher era.
Quite simply we may as well think big and use a completely different approach to cutting government spending.
Instead of starting at current spending levels and trying to negotiate spending reductions from current levels, the IEA paper proposes that we should clear the decks. Government has become so dysfunctional in every area that we should start from scratch. Over a five-year period all government functions should be subject to a new kind of Beveridge report that radically looks afresh at everything that is done, if it should be done and how it should be done. The results would be different from the wartime Beveridge report of social insurances but the decisions should be just as radical. The reports should be undertaken by people sympathetic to minimising the role of government and maximising the space for the private sector and the “big society” in solving economic and social problems. And the reviewers should have analytical minds – like Beveridge’s – so that they produce new approaches to public policy that achieve limited objectives efficiently and do not entrench bureaucratic interests.
In implementing reforms it would be known in advance that there would be an overall cap on expenditure of 30% of national income and proposals for reform would only be accepted if they could be enduring – that is if they did not entrench vested interests that gradually expanded the role of government.
In education, for example, the aims might be to require parents to ensure their children were educated and for the state to provide finance to parents ring-fenced for that purpose. An Act of Parliament could lay out what was defined as education and local authorities could simply be responsible for taking cases to court where they did not believe that the ring-fenced funding was being spent by parents in the way defined in the Act. The poor would be helped, competition would raise standards and parental choice would be paramount.
Armies of bureaucrats at central and local government level would simply have no function and would have to go. Government education spending would be way below current levels: perhaps only 50% of 2009 spending, though parents could spend more if they wished from higher post-tax incomes.
Similar approaches need to be taken across each government function such as policing, health, pensions and welfare. Huge swathes would be cut out of public spending but standards of provision would rise.
In summary, every government department must be razed to the ground. The reality is that if the next government is not going to raise taxes, they must cut spending by at least £167bn. This can be done but not by starting from where we are today. A Conservative government that really believes in a free economy should have a spending target of 30% of national income by the end of its first Parliament, financed by a flat tax. Minds must be focused on how that target will be achieved by 2015. The aim should be for the electorate to be happy even if Sir Humphrey is enraged.