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Coffee House

Danny, David and tax

24 June 2012

1:15 PM

24 June 2012

1:15 PM

What are we to make the split between Danny Alexander and his predecessor as deputy Chancellor, David Laws, over the size of the state? Laws says today it should be 35 per cent of economic output, which is an excellent ambition. In an interview with BBC1’s Sunday Politics today, Danny says 40 per cent. A split? When asked, Alexander said: ‘I think around 40 per cent is the right sort of range to be looking at. It’s only in the last four or five years that we’ve seen the share of the state taken up by spending rising to nearly 50 per cent, as it did in Gordon Brown’s years.” 

Well, in this case Danny is sticking to the Treasury’s forecast. By its (understated) figures, state spending is 46% of GDP now and will be 40.5% in 2015-16 – after which point the LibDems propose to stop the cuts. But two pieces of research recently proposed going further. The 2020 Tax Commission, of which I am a member, proposed keeping going at this rate and have taxes at about a third of economic output by 2020. The Centre for Policy Studies recently released a great wee study showing that countries with smaller governments grow faster and are most prosperous. Having tax/GDP ratio of 40pc is the threshold for a small government. Here’s the video:-

[Alt-Text]



The Lib Dems may want to stop at 40pc, but there is a strong case for slimming down the size of government even more – the better to compete with Asian nations of similarly small government, and to get government out of the way of growing companies. So on this one I’m with Laws, not with Alexander. But in mentioning 35 per cent as a goal and making the moral case for a smaller government, Laws is more radical than many Tories. You can bet Osborne would run a million miles away from a 35% figure. Too many Tories remain haunted by Oliver Letwin’s disastrous handling of this very question in the 2001 campaign. 

It’s worth mentioning that the Treasury’s ‘total’ figure is not really a total. It fiddles the books still, and counts tax credits as negative income tax when in fact they should be accounted for as welfare. The place to look for the real figure is the OECD’s standardized data series, which shows UK state spending/GDP at being 50.1% last year (it doesn’t have a 2015 prediction). The below graph shows the Treasury’s measure, and that of the OECD. Both show we’ve never had it so low as 35pc to which Laws talks about. We can assume that Alexander was referring to the OECD measure, because state spending never hit 50pc under the fiddled Treasury measure:

But as David Laws tells the Sunday Telegraph, state spending even at 40pc of GDP ought to appall every right-thinking liberal. Why, in this day and age, should the government be accounting for such a large chunk of a supposedly free 21st century economy? As he tells the Sunday Telegraph: “Even after the existing fiscal consolidations, state spending will account for some 40 per cent of GDP, a figure that would have shocked not only Adam Smith, William Gladstone, and John Stuart Mill, but also John Maynard Keynes and David Lloyd George.The implication of the state spending 40 per cent of national income is that there is likely to be too much resource misallocation and too much waste and inefficiency.

It also shows that the British government grew faster over the last decade than any other country over any other postwar decade and was as low as 36.6% in 2000, before Brown ditched prudence and started the spending binge which had such disastrous results. The Brown years were an audacious power grab by the state, and to Nick Clegg’s credit he made this point (at the time) better than the Tories did. Suffice to say, there’s still a lot of work to do before the power balance between state and society is restored.

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