A long way to go

George Osborne has probably done enough to ensure that the public finances are back on track and that the national debt will not run out of control.

He has, however, taken only the first step on the road to reducing the size of the state. The government will spend the same proportion of national income in 2015 as it did in 2007. In other words, the size of the state will be no smaller when David Cameron goes to the country than when Gordon Brown left the Treasury.

Much more could have been done and low-hanging fruit has been left on the tree…


Read the rest of the article on The Spectator’s Coffee House blog.

My own personal activities are in need of attention after all the neglect and mistaken policies of the last thirteen years.I am today ‘announcing’ cuts in my administrative costs over the next five years (with no adverse impact on output), plans to improve my productivity by getting up an hour earlier in the morning, plans to improve my physical fitness by going on a three-mile run every morning (starting tomorrow), and plans to reorganise my dietary arrangements, which should improve my health while reducing the cost of nourishment.And I can report that after all this ‘planning’, I feel better already!

Dr Booth: Having skimmed the Chancellor’s Budget Statement, George Osborne seems to make the right noises about addressing the structural deficit, interest payments, and debt, having ‘set a target of national debt falling as a proportion of national income’ by 2014-15 (though this reduction may be based less on spending cuts than on anticipated revenues due to rising productivity).Given your analysis of the whole Spending Review—the particulars of which over-whelm this non-economist!—may I infer that this Statement is at best an aspirational document with the all-important requisite specifics to come?

Dr Booth: Another query, this time with respect to the Laffer Curve. In your Coffee House column, you call attention to the Chancellor’s ‘chilling’ assertion that ‘Our aim will be to extract the maximum sustainable tax revenues from financial services.’This appears to be tacit consent that beyond the ‘maximum sustainable’, revenues will decline as productivity incentives decline—of course, as you point out in a preference for ‘the minimum revenue necessary’, property rights equity will suggest something far less.Yet, given the Treasury’s CGT increase and its continuance of the high marginal tax rate of 50pc, its claim to sustainable tax revenues appears a haphazard promise.

Stephen – it is somewhat better than that. I think there is too much credibility invested in this for the spending cuts not to take place, but we have not got all the detail yet and some of the welfare reforms for example may not save the money expected. On the second point, as you say, at least he is recognising that there is a Laffer curve – but this used to be used as a reason to reduce taxes. Now it is being used as a reason to get to the top if we are not there yet! And you are right, some government ministers seem to be happy to keep taxes high even if we are beyond the top of the Laffer curve.

Dr Booth: Many thanks for your additional thoughts; I surprise myself with my Budget scepticism! Some conservative economists are apparently content to advocate in the short-term for mere balanced budgets, while their colleagues warn about the exponential effects of interest plus the lurking presence of ‘vigilante bond holders’—combining the added threat of rate hikes—so I tend to err on the side of extreme caution.In Canada, the much vaunted success of government retrenchment in the mid-90s has been lost to the exorbitant public debt of Ottawa and the provinces. The hyper-partisan nature of our minority House of Commons bodes ill for our fiscal future.

Perhaps you can write us a blog post on Canada’s post retrenchment expansion in debt at Provincial level. Presumably there is no credible no bailout of the provinces. What are the credit ratings of the provinces like?

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