Under the IEA’s plan government spending would be cut by an additional £215bn a year (to around 30% of GDP) and deliver tax cuts equivalent to around £7,500 per household
- IEA research report Sharper Axes, Lower Taxes
New research by the Institute of Economic Affairs shows how the government could reduce public spending by an additional £215bn. This would mean the government would be spending around 30% of GDP instead of the government’s proposal of around 40%. The IEA’s proposals would deliver average tax reductions equivalent to around £7,500 per household each year.
The reforms proposed in Sharper Axes, Lower Taxes: Big Steps to a Smaller State could also increase economic growth by 0.75% a year leading to dramatic improvements in long-run living standards.
Delivering a comprehensive spending review by going through government spending area-by-area this report sets out how the government could reform spending and tax policy. It shows that the government’s aspirations – such as ensuring that all have access to decent health care, and providing a welfare system for the less well-off – could be achieved much more effectively with lower government spending.
Some of the biggest spending cuts include: £44bn from health reforms, £46.5bn from reforms to the welfare state and pensions; £17bn from defence; and £12bn from foreign aid. £40bn per annum will also be raised from asset sales. (For a full list of reductions in expenditure, please see the notes to editors).
- Opinion poll results
Opinion poll research conducted for the IEA by ComRes shows overwhelming public support for a much deeper programme of spending cuts.
By the time of the next election, the government is intending to spend around 40% of national income, but 55% of the public who expressed an opinion believe that public spending should be 35% or lower and only 16% want public spending to be measurably more than the coalition is intending to spend (45% of national income or more). 29% believe the coalition has got it about right, favouring the state spending between 35% and 45% of national income.
A much more radical reduction in state spending is particularly popular amongst the young (67% of under 25s and 69% of 25-34 year olds support government spending being reduced to below 35% of national income). There is a broadly equal level of support from voters irrespective of their party political affiliation.
Given a straight choice between the coalition’s plans of government spending of 40% of national income and the IEA’s more radical plan of reducing spending to about 30% of GDP and implementing average tax cuts of £7,500 per household, the overwhelming majority (70%) favour the IEA’s proposal and only 30% favour the coalition plan.
Commenting on the report, Mark Littlewood, Director General at the Institute of Economic Affairs, said:
“The coalition government should listen more to the British people in general and less to organised special interest groups that push for more government spending. Lobbying from interest groups can push tax and government spending well beyond optimal levels.
“This poll makes clear that the public favour a dramatic reduction in the size of government and the right to keep more of their own money rather than surrender it in tax.
“The government needs to adopt a Plan A+. Embracing the sort of proposals in this report would stimulate economic growth, which has remained disappointingly sluggish in the wake of the coalition’s unambitious plans so far.”
Commenting on the report, Prof. Philip Booth, editor of the report and Editorial Director at the Institute of Economic Affairs, said:
“Even under these plans, the government would be spending nearly one third of national income. If the government were limited to such a budget it could still perform the tasks it needs to perform much more effectively. There would be access to good healthcare for all and the poor would still have their incomes topped up but the government would become the servant and not the master of the people again. We would, once again, be able to have a welfare system that did not lock people in poverty.
“If the government wants to achieve genuine public service and welfare reform and ensure that health, education and other services are responsive to the people they are intended to serve it must take a long, hard look at these proposals.”
- Government’s plans insufficient
· Government spending is currently around 50% of national income. At these levels it is seriously damaging economic growth. Even if the coalition achieves its objectives, there will be only modest reductions in government spending. Nominal spending will rise, real spending will be cut by less than 1% per annum and spending as a proportion of national income will fall back only to 2007 levels – around 40%.
· A complete review of government functions could, using the government’s definitions of government spending and national income, lead to further cuts of £215 billion to around 30% of national income.
· Under these proposals, the government would also be making fewer unfunded health and pensions promises to future generations, thus putting the public finances on a sound long-term footing.
· Government spending – even in areas such as research and development, investment and education – has little or no beneficial effect on economic growth. The taxation necessary to fund government spending, however, seriously and adversely affects economic growth. A reduction in government spending of the order suggested by our authors would lead to economic growth increasing by more than 0.75% per annum: this would mean that national income would grow by an extra 20% every 25 years.
- Substantial tax reform needed
· To finance government spending of around 30% of GDP, taxation could be reduced and simplified.
· Although it is difficult to estimate precisely, it would seem feasible that tax could be set at:
o A single flat-rate income tax of about 15% on income above the tax threshold, which would be determined by household size.
o A single person’s allowance could be around £12,000. Larger households would have much higher tax allowances so that a four-person household on median earnings would pay little income tax.
o Corporation tax of 15%.
o National insurance rates of about 10% split between employer and employee above a lower threshold than the income tax threshold so that all workers made some contribution.
o A value added tax of about 10% across a broad base of spending.
Notes to editors
1. For a copy of the full report Sharper Axes, Lower Taxes: Big Steps to a Smaller State or to arrange an interview with Prof. Philip Booth (editor of the report and Editorial Director at the Institute of Economic Affairs) or Mark Littlewood (Director General of the Institute of Economic Affairs) please contact Ruth Porter, Communications Director, firstname.lastname@example.org or 077 5171 7781.
2. The following endorsements of the report have been provided by MPs and academics.
“In this swash-buckling report, the IEA points to the bureaucratic waste holding the economy back, and the tax cuts that would fire jobs growth and promote the three vital economic virtues – enterprise, hard-work and saving.”
- Dominic Raab MP
“Reducing and controlling spending has to contribute more to deficit reduction. So far tax rises have been taking most of the strain, making growth more difficult to achieve. I welcome this source book for making more progress in getting spending to a level taxpayers can afford, and hope the government will take up at least the best ideas from the list.”
- The Rt Hon John Redwood MP
“The IEA has put forward radical but achievable plans to simplify tax, incentivise work, end middle-class welfarism, boost growth and leave people with more disposable income. Don't let anyone tell you that such policies are "unrealistic". The same thing was said about almost every successful free market reform, from the lifting of price controls to leaving the ERM. The truly unrealistic approach is to carry on with policies which are leaving our country poorer, more fractious and less free."
- Daniel Hannan MEP
“As George Osborne struggles manfully to save Britain from the disastrous inheritance of a Labour Government which for 13 years spent like a drunken sailor on shore leave, the IEA has ridden to his aid by itemizing billions in potential savings for the ravaged, ill-used taxpayer. This is the British equivalent of the Republicans’ inspiring Ryan Plan in America; a manifesto of genuine hope in the future, rather than the tinsel variety offered by Barack Obama. Sadly, not all the IEA’s ideas are immediately deliverable because of the exigencies of coalition politics at Westminster, but by merely putting these radical, innovative, far-sighted, brave and overdue options in the frame, the IEA has refreshingly reminded us that conviction politics did not die when Margaret Thatcher was overthrown a generation ago.”
- Andrew Roberts, historian
“This important report challenges the conventional wisdom that the cuts announced in the Comprehensive Spending Review amount to a significant reduction in government activity. On the contrary, the report shows that the CSR barely scratches the surface of the reductions in public spending necessary to create a freer economy and a more prosperous society.”
- Dr John Meadowcroft, Lecturer in Public Policy, Kings College
“The rapid growth of the state in the first decade of the 21st century, the public sector’s atrocious productivity record and the catastrophic fiscal deficit are surely the most disastrous aspects of Labour’s economic legacy to the coalition government. The Chancellor has, commendably and in the teeth of hysterical opposition, taken some steps to curbing public spending and rectifying the public finances. But, if Britain’s lost competitiveness really is to be restored and the brake on growth released, he needs to be far more radical.
“Sharper Axes, Lower Taxes: Big Steps to a Smaller State is a superb report that tackles Britain’s problems head on and provides a timely reminder of just how growth-wrecking Labour’s big-state economic policies were. Its sharp analysis and thoughtful recommendations for shrinking the state should be required reading for everyone in government – not just the Chancellor. Even if only half of its recommendations were to be implemented the economic transformation would be dramatic.”
- Ruth Lea, Economic Adviser, Arbuthnot Banking Group
Area of expenditure Proposed cut (£bn)
Education, training and childcare 15.5
Pensions and the elderly 15.5
Foreign aid 12
Income transfers 31
Transport (incl. first year of road privatisation programme) 30
Energy and climate change measures 10
Total ‘headline’ spending cuts 215.5
4. The £215bn is based on the calendar year 2015 and is in addition to the cuts the government has already announced.
5. An additional £27bn cuts in government spending are proposed that the government does not include in its own definition of spending.
6. Methodology of ComRes poll – ComRes conducted an online survey of 2,050 GB adults between the 8th and 10th July. Data were weighted to be demographically representative of all GB adults. ComRes is a member of the British Polling Council and abide by its rules.
7. The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.