I'M GOING out on a limb here. The fashion is distinctly for castigating the coalition at the moment, from both right and left. But I’m a fan of the government – at least of what it has set out to achieve – and here’s why.
The coalition is a worthy successor to the radical inheritance of British economic policy-making that has been the country's hallmark since 1979.
This might seem an odd thing to say at a time of debt-laden depression. After all, the economy is shrinking and debt is increasing. But in fairness the government has been unlucky, with global commodity prices and the Euro catastrophe undermining its efforts. It is following the only sensible path available to it – a combination of default (otherwise known as depreciation and money printing) and spending cuts. Strong growth will only materialise when both private and public sectors have controlled the debt mountain.
The coalition simply does not have the political mandate to try more radical tax cutting and deregulatory methods that might hasten this process. As it is, the government has made decent progress rebalancing the economy, with nearly a million private sector jobs more than replacing half a million public sector non-jobs. On top of that it is simplifying both the planning system in England and parts of the tax code. All these measures will bear fruit in the future.
But the truth is that this is a sideshow. Britain’s central, long term economic problem is NOT debt. It is the public sector.
Public spending in Britain accounts for about 45% of GDP. The figure is nearly 50% in Scotland. Yet what matters more is not the level of taxation, but the way the money is spent.
For many years, Conservatives and others on the right in Britain have been obsessed by levels of taxation. The Lawson tax cuts were applauded, and Brown’s stealth taxes denounced. Yet for all the sound and fury, overall levels of taxation in Britain have remained remarkably consistent since 1979, at between 40% and 50% of GDP. There are very good reasons for this, to do with the dynamics of politics and the nature of voter behaviour in a democracy.
Don’t get me wrong – I agree that taxes should be low and simple. But what is much more important, given the narrow bands within which tax levels inevitably fluctuate, is how government money is spent.
Take a simplistic analogy to make the point. Country X takes just 30% of GDP in tax. But the money is spent paying people to dig holes and fill them up again. Country Y takes 60% of tax, and gives it back to people to spend as they wish. Which country is likely to have the more dynamic economy?
Britain is closer to the Country X model than most developed economies. Our tradition (if not the current reality) is for relatively low taxes, but our public sector is woefully inefficient. Its centralized model of command and control is based on the same principles as communism. There is a complete absence of market competition, either on the investor or the consumer side. Bad management is rife. In other words, we pay a hell of a lot of people to dig holes.
A country such as Belgium, for example, is closer to the Country Y model. Taxes are high and government is big. Indebted, socialistic and Europhile, Belgium is virtually beyond the philosophical pale in the traditional British Conservative analysis.
Yet it is much richer and more productive than Britain. Why is that? One big reason is that the public sector is more competitive and open to market influences or their equivalent – choice, consumer empowerment, institutional autonomy, mixed finance, competing models of governance and so on.
The reformers of the Thatcher era in Britain were always operating with one hand tied behind their backs. However much they liberalised financial markets, improved labour relations or privatised state enterprises, they were only scratching the surface. All their measures touched only a fraction of the economy. In 1979 the vast bulk of British GDP was accounted for either by private companies that were already competitive or public services that the Thatcherites dared not touch. However much they reformed the steel sector or the coal mines or the utilities, it was never going to make that much of an impact to overall performance.
According to the economic historian Nicholas Crafts, Britain’s relative economic performance stabilised between 1980 and 2000 without making up much of the ground lost in previous decades. The reforms undertaken in that period, radical and necessary though they were, added nothing more than a couple of tenths of a percentage point to our long term growth potential.
His analysis of the weakness of Britain’s economy shows that, particularly in the post war period, we were hampered by poor management stemming from inadequate competition.
Nowhere is competition weaker than in the public sector. Health, education, housing, defence, the universities, welfare, transport, policing - all accounting for a third of our economy or more. All run, until now, with no regard whatsoever for the principles of market capitalism.
All are the focus of radical attention by the coalition government.
Free marketers like to point to the example set by countries such as Estonia which transformed its economy after being released from Communism. Growth rates, productivity and prosperity all soared.
That prospect now beckons for the 30-40% of our economy hitherto run on communist lines. The wall is coming down, not between East and Western Europe, but between the state and the private sectors in Britain. Economic transformation beckons.
Well, for most of us. Scotland, needless to say, eschewing anything that comes from ‘down south’, will be left behind.