Sharing the proceeds of shrinkage
24 March 2009
SUGGESTED
Economic Theory
Economic Theory
25 March 2009
Government and Institutions
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.
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.
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Good article, excellent logic, genius headline.
Good article, excellent logic, genius headline.
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?
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?
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
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
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.
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.
No easy pickings? There are whole government departments that could be disolved!
No easy pickings? There are whole government departments that could be disolved!