Monetary Policy

From an inflation-fuelled state-run economy to an overregulated high-tax economy

What’s the easiest way for a government to push their country into the top ten in a worldwide ranking of economic freedom? Coupling unpopular reforms (such as spending cuts) with popular ones (such as tax cuts)? Starting the reform programme in a crisis, when the need for reform is widely accepted? Implementing reform at a rapid pace, so that opponents have to aim at a moving target?

None of the above. The easiest way is starting in the top five in the first place. This is how the UK’s ranking in the latest edition of the Economic Freedom of the World(EFW) report should be interpreted. In the overall ranking, the UK shares a respectable 9th place with Australia, out of 141. In absolute terms, this corresponds to a point score of 7.89 on a scale from 0 to 10, where “0″ represents a fully state-run economy and “10″ represents an economy relatively free of state intervention. By European standards, this is not bad at all. Only Ireland and Switzerland do better. But by the UK’s own recent standards this is clearly a backward step which continues a downward trend since 2000.

The UK was rated 6.72 in 1980, 8.12 in 1990 and 8.25 in 2000. The country is now back to where it was about 20 years ago – though, of course, there has been a lot of movement below the surface of the big aggregates. Back then, the UK performed worse than today on subcategories like “government enterprises and investment”, “top marginal tax rate” and “inflation”. Today, areas in which the UK fares particularly badly (score < 5.00) are “government consumption spending”, “hiring and firing regulations”, “bureaucracy costs” and “burden of [business] regulation”.

Amongst other things, then, the pronounced increase in government spending over the last decade is a major factor behind the downward tendency in economic freedom. Given the UK’s exceptionally high rate of implicit government debt, and given that the EFW data do not yet incorporate the full effect of the financial crisis, this trend looks set to continue.

Unless, of course, we begin to ask more fundamental questions about which public services really need to be “public”. Relinquishing some major tasks to private provision would be an alternative to huge tax increases on the one hand, and to deteriorating public services (while private substitutes are out of reach) on the other. But this would have to be preceded by an intellectual revolution no smaller in scope than the one which enabled the UK to climb to the EFW top five last time.

Head of Political Economy

Dr Kristian Niemietz is the IEA's Head of Political Economy. Kristian studied Economics at the Humboldt Universität zu Berlin and the Universidad de Salamanca, graduating in 2007 as Diplom-Volkswirt (≈MSc in Economics). During his studies, he interned at the Central Bank of Bolivia (2004), the National Statistics Office of Paraguay (2005), and at the IEA (2006). He also studied Political Economy at King's College London, graduating in 2013 with a PhD. Kristian previously worked as a Research Fellow at the Berlin-based Institute for Free Enterprise (IUF), and taught Economics at King's College London. He is the author of the books "Socialism: The Failed Idea That Never Dies" (2019), "Universal Healthcare Without The NHS" (2016), "Redefining The Poverty Debate" (2012) and "A New Understanding of Poverty" (2011).