3.5.2 Levels of Government Spend and Taxation

(This is an archived extract from the book Patterns of Power: Edition 2)

The previous section (3.5.1) focussed on collecting tax to fund government spending. This section reviews the arguments for and against government spending in the context of the overall health of a country’s economy. From a purely economic perspective it is possible for private individuals and companies to provide everything that a State might provide, with each person being responsible for paying their own way; those who were unable to pay for themselves might be looked after by family members or private charities on a voluntary basis. Individualists would tend to prefer such a policy. In complete contrast, a collectivist policy would require the collection of taxes to fund transfer payments and public services, to ensure that everyone can have access to the services that they need.

Individualists prefer the freedom to make their own choices of what services to buy. If they are wealthy, they would personally find it cheaper to pay for their own services rather than to pay a contribution towards a publicly-funded service via a system of progressive taxation – as illustrated by the earlier example of dentistry (3.2.4.5). And, without taking account of their self-interest, there are some more wide-ranging economic arguments that they might put forward:

· Private enterprise can determine where infrastructure and services are needed and then quickly provide them without requiring government spending.[1]

· Private provision of infrastructure might be inherently more efficient as a result of the operation of supply and demand (3.3.2).

· People are more likely to be satisfied with services that they have chosen for themselves (3.2.2).

· If they were able to buy themselves better services, people might work harder and thereby create more wealth.

· If a government tries to provide services itself, it cannot match the market’s ability to provide innovation, diversity and responsiveness to consumer demand – so it is less likely to fully exploit the economic potential in any market sector.

· People are less likely to make wasteful use of services they have to pay for. This is a strong argument for people being charged for utilities, such as electricity, and the principle can be extended to the use of some infrastructure such as trunk roads.

· All taxation is a drag on the economy (3.2.4.6).

· It has been argued that more wealth might be created in total if the tax system were tilted to give bigger incentives to rich people, by allowing them to retain a higher proportion of the wealth that they create – as in the popular expression used by President Kennedy and others: ‘a rising tide lifts all boats’. The data though, since the 1980s, don’t support this assertion.[2]

Collectivists prefer to give some economic power to the State and/or local government to ensure that everyone has the basic economic necessities to live a dignified life and fulfil their potential, whilst spreading the associated costs so that wealthier people pay more, as described in the previous section (3.5.1). They might also argue that the economy as a whole derives some benefits from such a policy:

· Benefit payments put money in the pockets of the poor. The poor are more likely than wealthier taxpayers to spend that money immediately in their own countries – so national consumer demand is increased and there are more customers for businesses.

· When people have a lot more money than they need for their regular financial commitments they want to invest it, in shares or property for example, and this can lead to ‘asset-price bubbles’ and financial instability; just such a bubble in property prices fuelled the financial crisis in 2007-8 (3.3.4.3). More equal societies are therefore less likely to be financially unstable.

· Public funding for infrastructure can take a long-term view of future benefit and governments can invest where no single company would be able to do so (3.2.8).

· Public provision should be able to leverage the benefits of scale and eliminate duplication, though there are concerns about its efficiency in practice, as discussed in the next section (3.5.3.1).

· It is better to provide State funding for education, which benefits the economy (3.2.5), than to put children to work before they have developed their full potential or to educate them less well.

· If public employees deliver necessary services there will not be any profit element in the cost to the taxpayer, and the workforce will not be motivated by anything other than the desire to give a cost-effective service – a proposition that is discussed later (3.5.3.6).

Overall it is fair to say that the individualist policies may benefit businesses, but with the effect of also increasing the inequality between rich and poor. A policy of economic inclusivity would need to ensure that this inequality does not reach the point at which poorer people can no longer feel that they inhabit the same society as everybody else. There are corresponding moral arguments on socio-economic rights, as shown in the next chapter (4.2.4.3), but the very definition of government spending means that the negotiations to reach a balance have to be conducted within the Political Dimension (6.7.1).

Apart from people's preferences for public or private funding, there is a limit on how much tax can be raised (3.2.4.6) – which puts an overall constraint upon how much government spending is economically sustainable. And tax income fluctuates across the economic cycle, so affordability must be assessed over the long term; the government has to be able to repay some debts during the good times, so that it can afford to borrow in the bad times – and avoid an ever-increasing level of government debt which would be a burden for taxpayers in later years (3.3.8.1).