George Osborne has only taken the first step on the road to reducing the size of the state

Prof Philip Booth comments on the CSR at a joint IEA/TPA briefing

Following the Comprehensive Spending Review, the Institute of Economic Affairs and the Taxpayers' Alliance held a joint briefing.

The text of Prof Philip Booth's analysis appears below, or you can watch a video of the presentation here .

“George Osborne has probably done enough to ensure that public finances are back on track and that the national debt will not run out of control. He has though, in my view, only taken the first step on the road to reducing the size of the state. There is much further to go. Whilst we will not see further reductions in spending in this parliament, I do hope that we see other radical reform that will rein in the size of government. It is a sobering fact that 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. Of course, the proportion of debt interest within that sum is greater - but that is the price that has to be paid when one generation decides to consume at the expense of another.

“I will begin by making a few remarks specifically about the CSR and then will talk about the longer-term scene.

“Much more could have been done. Low-hanging fruit has been left on the tree. There seems to have been an attempt made to not upset anybody – except married couples with one person on higher rate tax, who will lose child benefit in the Treasury’s reinforced campaign to systemically discriminate against family formation right the way through the tax and benefits system. Married couples with one person on incapacity benefit have also been discriminated against.

“What could have been done? I think that child benefit should have been scrapped for 16-19 year olds. Universal payments to pensioners (winter-fuel allowance, free TV licences and free bus travel) should have been abolished. The aid budget should have been cut but the money used much more efficiently. Aid is a real puzzle. The empirical evidence shows so strongly that aid has a tendency to damage the poor, but the government ploughs on regardless. At the very least, it is the one area where the government should assess spending on a project-by-project basis and not have a target for spending and spend up to that target come what may. The absurd “triple lock” for pensioners, which will lead to their real incomes increasing dramatically if there is deflation, should also have been scrapped. Picking this low hanging fruit could easily have created room for £10bn of tax cuts with all the supply side benefits and second-round effects that would have resulted from this.

“I was also concerned that the promises of increases in spending made by George Osborne were very firm and specific whereas the spending cut pledges were rather vague. There remains the nagging question of whether the cuts will be delivered. There also remains a concern that we will not see the desired increases in efficiency that will be necessary to avoid cuts to the front line. Sir Humphrey will do his best to make the cuts as painful as possible and deliver few of the efficiency savings.

“But let’s look at the long term. What I really wanted to see was radical public service reform. This is both good for the supply side of the economy and also would soften the blow of the cuts. There were few comforting messages here – though there may be more announcements in the coming months. The big area here, I think, is school funding. We desperately need to reform the system so that all funding is directed through parents thus cutting Sir Humphrey out all together. It is only if that is done that the pupil premium makes sense. Currently, schools receive all sorts of grants – as do local authorities – with provision being determined by a number of social factors. This should be replaced by a system of direct funding through parents where, in line with the principle of the pupil premium, parents for whom English is not the first language, parents of children with special needs and so on benefit from the pupil premium. This is also the system of funding most compatible with the development of free schools.

“It was gratifying to see some devolvement of responsibility in local government finance but I would have liked to have seen a complete review of local government finance announced with the objective of making local government more or less self funding and of devolving powers further down to parishes. There is strong evidence that fiscal decentralisation is important for much greater public sector efficiency. Surely this is a programme that can unit Liberal Democrats, Conservatives and people who believe in small government.

“The need for public sector reform is perhaps shown most in the NHS - the one area where we are not going to get reform. Productivity in the NHS has plummeted in the last ten years by an average of 0.3% per year, but the government wants to continue with broadly the same model. The government is also simultaneously preaching decentralisation, but then it is promising to bring in special ring-fenced funds for cancer drugs, dementia treatments and so on. It is interesting that the evidence on public sector productivity suggests that productivity growth is most rapid when spending is squeezed.

“My final point is this. Now this is all done and dusted, the government needs to turn its attention to radical supply side reform: a flat tax, reform of the minimum wage, reform of the planning system, decentralisation of public sector wage bargaining and a significant reduction in regulation. Only that way will the private sector thrive. Reform in these areas must become the focus of government policy in the next two years. Tax reform is possible, even within the constraints the government has set itself.

“Sadly, I see precious little evidence that this will happen. Osborne’s chilling remark: “Our aim will be to extract the maximum sustainable tax revenues from financial services” shows that the Treausry does not understand that all such taxes are ultimately paid by savers (potential pensioners) and the users of financial services (you and me). I want the Treasury to take the minimum revenue necessary from all sectors of the economy. We only have to look across the Atlantic to see what happens to an economy when a regime comes in and completely undermines the private sector supply side – US unemployment is beginning to get stuck at EU levels. We do not want that to happen here. Though we can be slightly optimistic with regard to supply-side oriented welfare reform, I am not optimistic with regard other areas. As I have noted, the government seems to regard the financial sector as both whipping boy and milch cow; the minimum wage has been increased and the full rate extended to younger people; we have the appalling EU maternity leave directive; it seems that FSA action on mortgage regulation is actually preventing new entrants into the market competing with the big boys; the "green agenda" is being implemented in the worst way possible; and the government has implemented its predecessor’s Equality Act.

“Some of this was inevitable. However, having won the intellectual battle with regard to the speed of deficit reduction, the government must realise that the full fruits of its actions will not be reaped unless it is still bolder with regard to public spending and public services and unless it also turns its attention to radical supply side reform.“

 

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