Author Topic: If we want more public spending we'll have to pay - Paul Johnson, IFS director  (Read 262 times)

Vanadium Gryllz

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From The Times, highlights and commentary by me:

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There are all sorts of ways to run a successful economy. In France, in Finland, in Belgium and in Denmark state spending is equivalent to more than half of the economy while in the US and Switzerland it is just a third of national income. Free higher education, generous state pensions and nationalised industries are common in continental Europe. The Singaporeans insist that their citizens save for their own health care and pensions.

We in the UK could choose to have a bigger state, or a smaller one, and still succeed as a nation. We could have more regulation or less, more state intervention or less, more welfare spending or less. The last Labour government did increase spending. The current government wants to get it down. But donít forget that the state today, in terms of the fraction of national income devoted to public spending, is almost exactly the same size as it was in 2008 after a decade of Labour government.


I think this is a slightly misleading sentence because in 2009 spending spiked (bailing out banks?) and has been falling since then.

Is this due to the way i've noticed economists (and politicians) like to frame some values as inflation-adjusted and some not or has public spending actually been going up in numerical (real terms? I don't know some of the right vocab here) value in line with inflation?
I just looked this up - it looks like it has indeed been going up in real terms but down related to GDP

Despite this, the national debt is still increasing.



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The publication of the latest Labour manifesto changed the terms of that debate. If implemented it would have shifted the UK up the international league table of public spending. It would have taken taxes to their highest level in peacetime. Less remarked upon, but just as radical, were the proposals for dramatically increased labour market regulations.

This programme has, wrongly, been characterised as being principally about a rejection of austerity. It was much more than that. Rather than overturning the fiscal policy implemented by the coalition and Conservative governments since 2010, it would have represented a step change in the size, role and scope of the state relative to anything we have seen in the past 30 years.

That is a crucial distinction. A rejection of austerity would mean more borrowing and more spending in the short run. It need not mean a bigger state in the long run. The complete abolition of student fees, the nationalisation of companies operating in rail, energy and water, the introduction of sector-wide collective bargaining have nothing to do with ending austerity. They have everything to do with creating a bigger state with greater powers to direct economic activity.

There are serious economic arguments about the appropriate speed of deficit reduction, otherwise known as austerity. They have generally been couched in terms of the gains to the economy, from more spending on the one hand set against the risks and costs for future generations associated with higher debt on the other. The logic of the anti-austerity argument is that economic circumstances are not currently propitious for spending restraint. It tells us nothing about the appropriate level of spending over the long run.

Here is a point that I think I lean more conservative on - How can public spending be increased if debt is already rising at current spending levels? Is the counter-argument that more spending ( on the right things I suppose - schools and infrastructure etc. ) are good for the economy and therefore, in the future we'll be able to pay off the debt due to how great we all are now?

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The arguments for a permanently bigger and more interventionist state are different. They depend not on a view about the appropriate level of borrowing today, but on a view about the role of government in a market economy. Just as reasonable people disagree about the appropriate pace of austerity they can also differ about the long-term role and scope of the state. Labour has opened that second debate. It is a hugely important one. There has, as yet, been remarkably little serious engagement with it.

As a good two-handed economist I can see the arguments for and against austerity and for and against a bigger state. It is not obvious whether we would be better off devoting the current 38 per cent of national income to public spending as opposed to the 45 per cent or so spent by many of our continental neighbours. In any case, not all government spending is the same. Quality matters as much as quantity.

If that is true on the spending side of the ledger it is true in spades when it comes to taxes. If you get spending wrong, in most cases the worst that you will do is waste money ó and at least the people you waste it on might be grateful. If you get tax wrong you can do serious damage.

The trouble is that political expediency can take you down dangerous routes when it comes to raising taxes. Much was made of Labourís desire to increase taxes on the rich. The fact that the vast majority of its proposed tax rises would actually come from companies ó and by no means only through reversing cuts in corporation tax ó came in for rather less scrutiny. What these ways of raising tax have in common is that they appear to leave most voters unaffected. That is a false impression. In the end taxes on companies have to be paid by people through higher prices, lower wages or less valuable investments, including those held in the pensions of private sector workers. Thatís a simple statement of logic. Big and poorly designed increases can also hit investment, and hence have big negative consequences for wages in the longer term.


OK so here I hear two arguments made against raising taxes - first, of the rich, is that they will pack up and leave and then we won't get any tax money from them. I don't really know if this is true but it doesn't sound right to me. It's not that simple (is it ever?) to even just define 'the rich' - someone making 100,000 a year is in a very different financial situation to those making huge multiples of that but they're still the 5%.  Where am I going with this? I suspect that the 'super rich' are already avoiding paying a much tax as possible.
I don't really believe that they would leave the country if taxes were raised, particularly not those on the lower end of the 'rich' scale.

I know it's a kick in the balls getting your 'hard earned' money taken by the tax man but ideally the money is being used to make everyone's lives better (ha. ha. ha.)

The second point, about raising corporation tax, I think is a more valid one - not that they will stop doing business in the country, that strikes me as absurd, but saying that the costs of increased taxation will be pushed onto the consumer and/or employees seems likely.
I guess the Labour answer to that is more power to trade unions... not sure on that one.

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What really worries me, though, is not the detailed arguments over this tax policy versus that, itís the sense that we seem increasingly to inhabit a world in which we really think we can, in Boris Johnsonís words, have our cake and eat it. It is delusional to believe that we can have a permanent increase in public spending without having to pay for it. If only policymaking were so easy. Iím afraid that here as in all contentious areas of politics there are trade-offs. We need to grow up and recognise them or we will find that the cake we hoped to enjoy just got a whole lot smaller.

Nothing here to disagree with. It's not just economic policy that gets oversimplified or has its more contentious points swept under the rug.
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