The Institute of Directors and the Taxpayers’ Alliance have just produced a report on cutting public spending by £50billion. The report makes excellent reading and is possibly the first really serious study that identifies particular items of spending and has a clear rationale.
Most studies of this type talk about “efficiency savings” (of course, there are some in the IoD, TPA report) or cut items of spending that will simply lead to the redirection of spending elsewhere, or cut easy targets that could be damaging to economic incentives (more on that below). This report has items of this type, of course, but it also represents a serious attempt to suggest things that the government should not be doing – something that John Major promised to examine when he was Prime Minister.
Given the rapid rise in public expenditure in recent years, as the IoD/TPA report shows, spending cannot be cut without individuals and families bearing real costs. Some pensioners will lose their free bus passes, parents will lose their Child Trust Fund contribution, the middle class will lose their child benefit, and so on.
What are the pitfalls? Clearly politicians are running a mile from engaging properly in this debate, because they know that if the right decisions are taken voters will suffer. As a result a package such as this one must be implemented in one go – and the alternative of £50bn of higher taxes must be spelt out and the effect on individuals of the alternative explained. Those implementing this must make sure they understand public choice economics. It must be made clear that the alternative to this package is very large tax increases that will fall on all earners. Secondly, nearly one third of the package comes from freezing public sector pay and abolishing child benefit. The former is a somewhat artificial measure – what we really need is a mechanism to ensure that public sector pay falls to market levels commensurate with the risk and perks of public sector jobs (but the IoD/TPA report is is an emergency package - I am sure the IoD would agree with that long-term objective). The latter is problematic because it will radically increase the means-testing aspect within the benefits system for families: this is already leading to significant disincentives to work and to form stable family units. I am afraid that the difficult decision of possibly cutting benefits to poorer families needs to be faced – together with large tax reductions for the poor, of course.
As the IoD and the TPA would be the first to recognise, this set of proposals is only a foundation. This plus efficiency savings and a general squeeze so that public spending rises much more slowly than national income over a ten-year period might do the trick of returning government spending back to 40% of national income. That only leaves another three quarters of government spending to strip out and we can return to enjoying the freedoms from government interference that we did at the beginning of the twentieth century.