How much should we tax? How much should we spend? The great unanswered questions in British politics

by Stephen Tall on September 10, 2012

A few weeks ago I took David Laws to task for proposing the UK needs to reduce public spending to 35% of GDP: it currently stands at 43%.

I stand by the three points I made then:
1) Just because public spending is higher in the C.21st than in Gladstone’s day is not in itself a sufficient argument.
2) Proposals for public spending cuts should be backed up by specific examples. (It’s a favourite trick of Conservative right-wingers in particular, for example, to preach spending restraint while also wanting to build new prisons and buy new weapons systems.)
3) There is no evidence that having a low tax-and-spend economy is itself a pre-requisite for sustained growth.

However, I do want to return to the core of David Laws’ argument by way of this graph, which shows total UK expenditure (black line) and revenues (blue line), both as a %-age of GDP, with the deficit (surplus) marked by the red columns, between 1996 and 2017:

What the graph shows is that UK expenditure generally outstrips revenues, and is projected to continue doing so for the next five years.

  • The average expenditure between 1996-2017 is 41% of GDP within the range 37%-47%.
  • The average revenues are 38% of GDP within the tighter range 37-39%.
  • The average deficit is 3% of GDP within the range of a surplus of 1.8% (2000-01) to a deficit of 11.1% (2009-10).
  • At its simplest, then, we are continually spending more than we earn. However, for as long as the economy grows at more or less the same pace as the deficit there is no additional national debt.

    David Laws’ question (though he couched it more provocatively) was a basic one: If the UK is only prepared to levy taxes at around 35% of GDP shouldn’t public spending match that figure over the long-term? There are three possible answers that I can see:

    1) We cut public spending (or grow it more slowly than the economy) such that, over the long-term, it matches the level of taxes we are all prepared to pay.

    OR

    2) We increase taxes such that, over the long-term, it matches the level of public spending we are committed to.

    OR

    3) We continue to incur deficits and accept a stable level of national debt as a way of life on the basis that for as long as we can meet our repayments, and our growth cancels out our deficit, it doesn’t matter much beyond the opportunity cost of servicing our debt.

    These are pretty fundamental political choices, yet the three main parties rarely discuss them.

    By default we have settled on the third option, perhaps because it’s right, or perhaps because it’s easiest. Either way, I’d like to hear more from our politicians about where they think the British economy ought to be heading: what they think we should be spending and being taxed, what level of deficit they think is prudent, and what the policy implications of these choices are. Who’s first…?

    * Stephen Tall is Co-Editor of Liberal Democrat Voice, a Research Associate for the liberal think-tank CentreForum, and also writes at his own site, The Collected Stephen Tall.