Sharper Axes, Lower Taxes

Big steps to a smaller state

Executive summary:

  • Government spending is over 50 per cent of national income. Spending grew steadily in the twentieth century and then experienced very rapid growth from the beginning of the 21st century.
  • Much government spending discourages economic activity and prevents innovation and competition in crucial sectors such as health and education. Furthermore, government intervention is incoherent. For example, government spending and implicit subsidies strongly encourage certain carbon-intensive activities; other forms of government spending are then used to try to reduce carbon-intensive energy generation.
  • The recent Comprehensive Spending Review was anything but comprehensive. Certain departments were omitted from the review altogether. Most other areas of spending were ‘salami sliced’. No coherent, bottom-up analysis of government functions has taken place. The government could achieve its main public policy objectives at much lower levels of spending if there were to be a radical review of all aspects of spending.
  • 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 cent per annum and spending as a proportion of national income will fall back only to 2007 levels.
  • A complete review of government functions could, as a first step, lead to cuts in underlying government spending of £242 billion in addition to the government’s proposed cuts. Using the government’s definitions of government spending and national income this would amount to a cut of £215 billion to around 29 per cent of national income.
  • 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 cent per annum: this would mean that national income would grow by an extra 20 per cent every 25 years.
  • The current welfare system discriminates strongly against work, family formation and saving. Welfare should be completely reformed to provide income supplements through a negative income tax with household tax allowances. Furthermore, welfare claimants without jobs and who are of working age should be required to undertake work as a condition of receiving benefits. Reforming welfare and related changes to pensions would save £46.5 billion a year.
  • The National Health Service should be replaced by health savings accounts with insurance for catastrophic risks. Experience from other countries suggests that this can lead to better outcomes, lower costs and much stronger incentives for health promotion. This reform would save £44 billion a year. More radical reform of education to save over £15 billion is required: reforms should include parents making some contribution to the cost of their children’s education.
  • Policy in areas such as defence and foreign aid should be strategically reviewed. Foreign aid should be cut entirely except for emergency aid: the evidence suggests that growth in poor countries will come about only as a result of the adoption of market economies and through private investment. Aid probably hinders growth in the poorest countries. Reforms to defence and foreign aid should lead to spending reductions of £29 billion a year.
  • Much government-owned infrastructure can be privatised; market-based solutions to transport urgently need to be adopted with a consequent elimination of government subsidies; and climate change policy is currently incoherent. Huge savings in government spending are possible in the field of climate change policy even if the government wishes to retain incentives to reduce carbon emissions. Over £80 billion a year could be available for tax decreases from the proposals made in these areas.

2011, Hobart Paperback 38, pp. 282, ISBN 978-0-255-36648-9

  • Opinion polling conducted by ComRes found 70% of people polled favouring the IEA's plan to get public spending down to 30% of GDP, as compared to the coalition government's plan to get spending down to 40%. Full results can be read here.
  • 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

Sharper Axes, Lower Taxes provides a very pragmatic programme for progress towards a more efficiently managed framework of public sector expenditure.”
   - Lord Howe

“The IEA is to be commended for publishing research which hopefully will extend the frontiers of the very limited debate we have on public expenditure. The publication, under the editorship of Philip Booth, reminds us that the cuts, often labelled austere or savage, will only bring public spending back to the same percentage of GDP as existed before Gordon Brown embarked on his extravagant spending spree that contributed to the financial problems that we recently experienced.

“I particularly enjoyed the chapter by Patrick Minford and Jiang Wang, which persuasively queries the idea that “state investment” contributes to higher economic growth. Elsewhere the pamphlet demonstrates growth is more likely to come from lower taxes.  There can be little doubt that Britain has lost competitiveness because of the high level of taxes, particularly personal taxes.

“No area of public expenditure escapes scrutiny in this pamphlet including overseas aid, and quite rightly so. It is also right that arguments for further cuts in defence spending should be aired despite the criticism that the existing cuts have already received. The authors query the implied threats to Britain’s security and the relevance of the budget to those threats. There will be much argument about this. I hope the pamphlet will encourage people to see the Government’s proposed deficit reduction programme in its proper perspective. I also hope that it will also contribute to a debate about the role of the State and what Government does, and what it really needs to do.”
   - Lord Lamont 

“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

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