Reviewed in the latest edition of Charity Times

James Bevan welcomes a radical but significant contribution to the debate on government cuts and welfare spending

With the well recognised challenges of personal and government debt and low growth facing the majority of developed economies, the Institute of Economic Affairs’ (IEA) new paper, Sharper Axes, Lower Taxes: Big Steps to a Smaller State, represents a thoughtful, provocative and timely addition to the debate on policy options, implications and choices.

The IEA paper is authored by eleven selected experts and sets out to show what a genuinely comprehensive fiscal reform package could look like. With what  can only be described as a right wing market economy approach, the authors identify those parts of government spending where outcomes do not appear to be strong relative to the level of expenditure, advocating a considered withdrawal of government from many of its present functions and activities. In this way, the report is not simply about ‘cutting’. It is also about plotting a course for transition to private sector provision of services in the fields of healthcare, education and old-age saving.

There are several beliefs-based start points for the IEA’s paper. First, the IEA commence with the premise that even with the Coalition’s plans and a following wind of decent economic growth, nominal spending will rise, real spending will be cut by less than 1% per annum and spending as a proportion of national income will fall back only to 2007 levels, around 40%.The IEA calls for a reduction of the public sector to around 30% of GDP, which would mean taking public spending back to the level it was at in 2001.

Secondly, the IEA’s core economic argument that a much larger reduction in government spending is required, rests on their assertion that government spending, even in areas such as research and development, investment and education, has little or no beneficial effect on economic growth, and that the taxation necessary to fund government spending adversely affects economic growth.

Thirdly, the IEA see government as just plain bad at delivering on a range of social objectives, and this is one of the drivers for their recommendation of a much greater role for the private sector. In this regard, the approach adopted by the IEA is radically different to, rather than a stronger version of, the Coalition’s plans. The IEA also argue that reduced government spending can justify lower taxation and enhance economic growth prospects. Thus, the IEA calls for reduction and simplification of personal, corporate and expenditure taxation, and the IEA anticipate that their proposals would deliver average tax reductions equivalent to around £7,500 per household each year. The IEA envisage their reforms could increase economic growth by 0.75% a year, leading to dramatic improvements in long-run living standards.

In contrast to the many political polemics published to support a view with high level unmeasured perspectives of costs and outcomes, the IEA’s report includes a detailed assessment as to how the government could reduce public spending by an additional £215bn.

The pure scale of the suggested cuts is underpinned by some headline grabbing spending reductions in areas of expenditure often seen as political hot potatoes such as health reforms (£44bn), welfare

state and pension reforms (£46.5bn), defence (£17bn) and foreign aid (£12bn), but critically, the authors seek to demonstrate, rather than just to claim, that the government’s normative aspirations, such as ensuring that all have access to decent health care, and providing a welfare system, could be achieved more effectively with lower government spending.

The IEA claim their proposals have overwhelming public support, with accompanying opinion poll research conducted by ComRes. Critics will argue that if the public are asked if they would favour less spending, less tax, more growth and enhanced social outcomes, the answer is obvious, and it is apparent from the IEA’s work and more generally, that the public have only a limited perspective of the issues and risks.

Nevertheless, whilst the government is intending to spend around 40% of national income by the time of the next election, and this depends on decent economic growth to square the circle of income and expenditure, 55% of the public who expressed an opinion believe that public spending should be 35% or lower and only 16% want public spending to be measurably more than the coalition is intending to spend.

Because the report is radical it will generate no shortage of criticism, and certainly the IEA report will be branded as being driven by extreme right wing ideology. But the report provides a clear articulation of one set of choices open to policy makers in addressing the huge challenge of growth, debt, and welfare, we should welcome what is clearly a significant.

James Bevan is chief investment officer at CCLA

This review appears in the August/September 2011 issue of the Charity Times