It was the same old story this Wednesday as the UK government had its annual spending budget review. Gordon Brown is the latest Chancellor of the Exchequer to indulge in the paradox of more wealth redistribution whilst at the same time claiming to be the god-like sustainer and stimulator of the British economy.
I grant that he is good at taking other people’s hard-earned cash and spending it on inefficient and bureaucratic enterprises such as public health services. But I deny that he is anything remotely close to a stimulator of the economy. Like almost all his forebears, his actions at best either impose a further drag on the economy or by a zero sum budget of give and take leaves it in the same poor state as he found it.
Small businesses initially quivered in optimism as corporation tax was reduced by varying degrees for startups and tax credits were granted for R&D budgets. But, they should have known that the Chancellor giveth and the Chancellor taketh away. And, so, hopes were dashed as employee contributions to social security were raised 1% to fund ailing public health services.
The British National Health Service is in an unkempt state. This appropriation of private property (salaries) will increase spending on it from its current 65 billion to 109 billion over the next six years (or over 7% per annum in real terms). This quote from the Chancellor is as wildly optimistic as it is contradictory:
"We have made our choice – a Budget to make our NHS the best insurance policy in the world. A British ideal – free at the point of need, for everyone in every part of Britain. Fairness and enterprise together."
These hoped for revenues rely on projected economic growth of 3.5% next year. It was the boast of Gordon Brown that Britain was leading the way out of recession with higher than average growth rates than Euroland. This can only be a boast when one Statist economy is only ever compared against other Statist economies for 3% growth is pathetic and indeed expected when over 40% of GDP is redistributed to monopolistic government projects and committee-approved interest rates are forever one step behind the real economy.
So, nothing new to report as Britain now joins the 40 per cent club of GDP leeches. Which brings me to a telling little graph I saw last week. It was the ratio of public spending to GDP for the USA, UK, France, Germany and Japan since 1870. As expected and longed for, all governments extracted only 10% from the economy to begin with.
Unfortunately, the graph rises inexorably to the 40%-50% range of today depending on the country and one wonders how much further it can rise as I remember a quotation allegedly from Maynard Keynes who stated that governments should spend no more than 25% of GDP on redistribution programs.
So, how much longer can this hyper-Keynesianism last? In theory, the graph will rise to 80%-90% of GDP by the end of this century. In practise, no income-earning voter will accept such a scenario as low-tax parties enter the democratic fray and win seats which could eventually hold the balance of power in coalitions fought out between larger Statist parties.
As the various states approach the ratio of 51% (i.e. the nation spends most of its time working for the government), one may imagine that this was a time for a nation to take stock and question the role of government. It could be argued that this will not happen for the reason that this level will not necessarily equate to 51% of a voter’s pay packet due to the burden of taxation being shared by companies and the psychological impact of overall taxes being hidden via indirect taxation.
But the more important factor may be the theory that increasing tax rates will decrease tax revenues (e.g. as suggested in the Laffer Curve).
By way of example, Sweden has the highest tax burden in the world, which hit 53% of GDP in 1998 but slipped to 52% in 1999. Is this dip prophetic or merely fiscal white noise? Has Sweden gone ahead of others and begun to realise that higher taxation means lower economic growth? (see this link for a further analysis).
The complexity of the perceived benefits of taxation versus the reactions of voting taxpayers make this a difficult one to call. One can only watch how Swedish fiscal policy pans out in the next few years. If taxation stabilises or continues to dip then we may surmise that tax rates and revenues have reached an equilibrium point.
Note that does not imply that the current rate of Swedish tax is acceptable but rather it merely tells us that the government can squeeze no more out of the economy. So, for once in my life I have begun to take an interest in Scandanavian politics and I can truly say that Sweden is a vanguard in taxation – albeit in the negative sense!
April 19, 2002
