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I am not altogether clear at the moment what the Conservatives’ policy is at the broader fiscal level. In current circumstances they probably need a few months to sort things out but they must speak with some clarity soon. It is clear to me that just as the Bank of England need to lay out their medium term objectives regarding monetary policy and explain how they will achieve them, the Conservatives need a Medium Term Financial Strategy (to use a phrase from earlier Conservative governments) for fiscal policy. If they come into government they will inherit a mess every bit as substantial as the one inherited in 1979. They will also have fewer “easy pickings” such as privatisation revenues and reductions in marginal rates from 98% available to them.

The previous strategy was “sharing the proceeds of growth”. I am not sure if this has been ditched or not. If the economy were to grow by 2% then government spending would rise by 1%. It was an odd strategy as it makes no attempt to ascertain whether government spending is worthwhile or not. Why build a few more bridges over the River Humber just because we need to raise public spending by 1% above inflation? If items of government spending should be scrapped, then scrap them.

However, it is understandable, perhaps, that the Conservatives might have wanted such a strategy in order to keep a discipline on spending departments whilst reassuring the electorate. Politicians have to think about the real world of public choice. In that case, the rule must also be symmetrical and the government must “share the proceeds of shrinkage”. Thus, if the economy shrinks by 2% in 2010, then the Conservatives must cut government spending by 1% in real terms. This will still leave the share of government in GDP growing during a recession but, on average, there should be more good years than bad and gradually government spending will fall.

But what about the starting point? It is likely that the government share of GDP will be about 8% higher if and when the Conservatives take office than at the time the “sharing the proceeds of growth policy” was announced. They could be in their third term before we are back to square one! In fact, neither sharing the proceeds of growth nor sharing the proceeds of shrinkage will be enough – we will need some radical action.

Philip Booth 154x154

Academic and Research Director, IEA

Philip Booth is Academic and Research Director at the Institute of Economic Affairs and Professor of Finance, Public Policy and Ethics at St. Mary's University, Twickenham. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. Previously, Philip Booth worked for the Bank of England as an advisor on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs and on the editorial boards of various other academic journals. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

10 thoughts on “Sharing the proceeds of shrinkage”

  1. Posted 24/03/2009 at 12:18 | Permalink

    Good article, excellent logic, genius headline.

  2. Posted 24/03/2009 at 12:18 | Permalink

    Good article, excellent logic, genius headline.

  3. Posted 24/03/2009 at 15:38 | Permalink

    The real question is: what should government be doing? Or (put another way) what should government not be doing? Keynes said (in his Essay on ‘The End of Laissez-Faire’): ‘The important Agenda of the State relate … to those decisions which are made by no one if the State does not make them.’ If we accept that, huge areas open up for ‘privatisation’ in respect of schooling and health services especially. Obesity is said to be a problem for many individuals these days. Dare I suggest it is an even bigger problem for the grotesquely bloated govermment — and therefore for the wretched taxpayers?

  4. Posted 24/03/2009 at 15:38 | Permalink

    The real question is: what should government be doing? Or (put another way) what should government not be doing? Keynes said (in his Essay on ‘The End of Laissez-Faire’): ‘The important Agenda of the State relate … to those decisions which are made by no one if the State does not make them.’ If we accept that, huge areas open up for ‘privatisation’ in respect of schooling and health services especially. Obesity is said to be a problem for many individuals these days. Dare I suggest it is an even bigger problem for the grotesquely bloated govermment — and therefore for the wretched taxpayers?

  5. Posted 26/03/2009 at 20:26 | Permalink

    If Governments encourage spending to “attack” the present Economic Crisis, what should be bought ?
    In my view something that directly produces an income for the purchaser, which is not dependent on anyone else having to obtain an income from elsewhere,
    eg if I buy a car, I may provide income for many workers, but no wealth for myself – unless I run a taxi business – the workers and the car company’s costs eventually feed back to three basic commodities, animal – food, vegetable – food and fuel and mineral – metals etc and fuel.
    How much better if the “Stimulus Funds” were directly targeted at wealth creation from the three commodities, supporting agriculture, supporting biomass & food produy

  6. Posted 26/03/2009 at 20:26 | Permalink

    If Governments encourage spending to “attack” the present Economic Crisis, what should be bought ?
    In my view something that directly produces an income for the purchaser, which is not dependent on anyone else having to obtain an income from elsewhere,
    eg if I buy a car, I may provide income for many workers, but no wealth for myself – unless I run a taxi business – the workers and the car company’s costs eventually feed back to three basic commodities, animal – food, vegetable – food and fuel and mineral – metals etc and fuel.
    How much better if the “Stimulus Funds” were directly targeted at wealth creation from the three commodities, supporting agriculture, supporting biomass & food produy

  7. Posted 26/03/2009 at 20:29 | Permalink

    The Economy could then start to be rebuilt on the Rock of Real Wealth, instead of on it’s present foundations of the Sands of Finance.

    The UK Government is forming a division to oversee all Green Purchasing, see http://www.publicserviceevents.co.uk/main/programme.asp?event_ID=80
    Provided there is not a major infection of Governmentium this could be very positive, it could be linked with UK Local Authorities starting to generate/collect their own Sustainable Energy, to defray Council expenses by it’s sale, as was a common practice before the 1948 nationalisation of all Local Authority energy facilities.

  8. Posted 26/03/2009 at 20:29 | Permalink

    The Economy could then start to be rebuilt on the Rock of Real Wealth, instead of on it’s present foundations of the Sands of Finance.

    The UK Government is forming a division to oversee all Green Purchasing, see http://www.publicserviceevents.co.uk/main/programme.asp?event_ID=80
    Provided there is not a major infection of Governmentium this could be very positive, it could be linked with UK Local Authorities starting to generate/collect their own Sustainable Energy, to defray Council expenses by it’s sale, as was a common practice before the 1948 nationalisation of all Local Authority energy facilities.

  9. Posted 28/03/2009 at 17:47 | Permalink

    No easy pickings? There are whole government departments that could be disolved!

  10. Posted 28/03/2009 at 17:47 | Permalink

    No easy pickings? There are whole government departments that could be disolved!

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