£50 billion of spending cuts: a good start

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.

Can this £50Billion be accomplished by reducing the contingency Reserve within the Budget. The Reserve is a big sum and is often wheeled out as the “money under the bed” to be used when needed. My concern is that it’s used much too freely and it’s use, for things like the Iraq war, should be strictly controlled. As far as budgets are concerned, are they usually drawn up on a “last year plus Inflation” basis? That would be my concern, members of the Civil Service fighting to keep their money in their patch, rather than really looking out for what is needed

Dr Booth writes: ‘a serious attempt to suggest things that the government should not be doing’. An important exercise for both the right and the left (arguably there are policy areas neglected by the State, as well as intrusions by the State). More generally, though, is the implicit focus—so important for Misesian economics—that must be given to State action that is conducive to the common good, and not to individual interests, corporate or personal, that serve no greater purposes beyond themselves.

Stephen – I can’t quite follow, I think there may be a typo in the long last sentence. The ‘common good’ (I assume you mean the Christian interpretation of the term) involves providing the conditions for human flourishing. It is not really a term used by Austrians, but Austrians do accept that there might be things that the state may have to provide because they would not otherwise be provided (such as public goods) but would also emphasise the limits of such concepts and that they can be provided privately. Certainly things such as education and art my serve no greater purpose beyond themselves, but it does not follow that it is the government’s job to provide such things.

Dr Booth: In writing of the common good my intent was the public interest — the State should not prefer monopoly to competition, should not become an accomplice to special interests to the detriment of the wider community. In mind was a passage from von Mises’s ‘Economic Policy’: The idea isn’t that ‘a legislator should represent … only the special interests of the district in which he was elected; that was one of the consequences of interventionism. The original idea was that every member of the legislature should represent the whole nation.’ It is easy to extrapolate to crony/monopoly capitalism: to uphold the free market is to denounce practices favouring the few over the many.

“the State should not [...] become an accomplice to special interests to the detriment of the wider community.”I’m sure any politician would readily sign that, and then still go on and serve the interests of their favoured constituency. That’s an in-built incentive in the political process. It’s not that present politicians are ’short-sighted’ or ‘narrow-minded’. They just like to be liked, as everyone else. And if that’s an aim, it makes perfect sense to tailor policies to interest groups. People who represent interests are the ones who are best informed about their respective policy area, and care most about it.
If we don’t like that, we should go for less politics, not ‘better’ politics

The hole in the public finances is in the order of £100 billion.The aggregate value of banks’ assets in the UK is £4.5 trillion.So why not tax that?“Seemples!” as Alexander Meerkat would say.

As a pensioner threatened with losing my free bus pass, may I make a practical point? Of course I accept that ‘in these difficult times’ probably all members of the public must be prepared to suffer a bit. But I remember how furious I used to get when my (totally undeserved) free bus pass wouldn’t work if I tried to use it in the morning rush hour (I think they’ve since relaxed that restriction). If even someone like me — who generally opposes government spending — felt cross, at having an unmerited benefit taken away, it suggests that politically it may make sense to come out with a long list of items all at once, so that everyone can see that everyone else is suffering too.

To go off at a tangent, now that so many journeys are financed by free bus passes, the local authorities and not the traveller are now the customer of the bus company. This is not healthy.

This report is an excellent contribution to the very hard debate ahead. Cosmetic change is not an option. The concern remains that the almost reflexive, “idealogical love” of the public sector by many often drowns out the calls of the sensible for the very radical approaches needed.

Can this £50Billion be accomplished by reducing the contingency Reserve within the Budget. The Reserve is a big sum and is often wheeled out as the “money under the bed” to be used when needed. My concern is that it’s used much too freely and it’s use, for things like the Iraq war, should be strictly controlled. As far as budgets are concerned, are they usually drawn up on a “last year plus Inflation” basis? That would be my concern, members of the Civil Service fighting to keep their money in their patch, rather than really looking out for what is needed

Dr Booth writes: ‘a serious attempt to suggest things that the government should not be doing’. An important exercise for both the right and the left (arguably there are policy areas neglected by the State, as well as intrusions by the State). More generally, though, is the implicit focus—so important for Misesian economics—that must be given to State action that is conducive to the common good, and not to individual interests, corporate or personal, that serve no greater purposes beyond themselves.

Stephen – I can’t quite follow, I think there may be a typo in the long last sentence. The ‘common good’ (I assume you mean the Christian interpretation of the term) involves providing the conditions for human flourishing. It is not really a term used by Austrians, but Austrians do accept that there might be things that the state may have to provide because they would not otherwise be provided (such as public goods) but would also emphasise the limits of such concepts and that they can be provided privately. Certainly things such as education and art my serve no greater purpose beyond themselves, but it does not follow that it is the government’s job to provide such things.

Dr Booth: In writing of the common good my intent was the public interest — the State should not prefer monopoly to competition, should not become an accomplice to special interests to the detriment of the wider community. In mind was a passage from von Mises’s ‘Economic Policy’: The idea isn’t that ‘a legislator should represent … only the special interests of the district in which he was elected; that was one of the consequences of interventionism. The original idea was that every member of the legislature should represent the whole nation.’ It is easy to extrapolate to crony/monopoly capitalism: to uphold the free market is to denounce practices favouring the few over the many.

“the State should not [...] become an accomplice to special interests to the detriment of the wider community.”I’m sure any politician would readily sign that, and then still go on and serve the interests of their favoured constituency. That’s an in-built incentive in the political process. It’s not that present politicians are ’short-sighted’ or ‘narrow-minded’. They just like to be liked, as everyone else. And if that’s an aim, it makes perfect sense to tailor policies to interest groups. People who represent interests are the ones who are best informed about their respective policy area, and care most about it.
If we don’t like that, we should go for less politics, not ‘better’ politics

The hole in the public finances is in the order of £100 billion.The aggregate value of banks’ assets in the UK is £4.5 trillion.So why not tax that?“Seemples!” as Alexander Meerkat would say.

As a pensioner threatened with losing my free bus pass, may I make a practical point? Of course I accept that ‘in these difficult times’ probably all members of the public must be prepared to suffer a bit. But I remember how furious I used to get when my (totally undeserved) free bus pass wouldn’t work if I tried to use it in the morning rush hour (I think they’ve since relaxed that restriction). If even someone like me — who generally opposes government spending — felt cross, at having an unmerited benefit taken away, it suggests that politically it may make sense to come out with a long list of items all at once, so that everyone can see that everyone else is suffering too.

To go off at a tangent, now that so many journeys are financed by free bus passes, the local authorities and not the traveller are now the customer of the bus company. This is not healthy.

This report is an excellent contribution to the very hard debate ahead. Cosmetic change is not an option. The concern remains that the almost reflexive, “idealogical love” of the public sector by many often drowns out the calls of the sensible for the very radical approaches needed.

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