1 March 2018

Splashing the government’s cash would be bad policy and bad politics


Snowmageddon and the incessant news about Brexit might mean that you missed it, but the government today announced that there is a surplus in the current budget, meaning that the deficit in the day-to-day budget has been eliminated. This is quite an achievement given that no UK government has run a surplus on the current budget since 2001-2002.

This is welcome news for the country, but also the Conservative Party. In 2010 they pledged to eliminate the deficit — and they were voted in based on that commitment. This is an important milestone on the road to delivering that promise.

It was essential that in the aftermath of the Global Financial Crisis and during the midst of the Great Recession and a sovereign debt crisis in the eurozone, the Conservatives no longer attempted to match Labour’s spending commitments. The profligate spending of the last Labour government massively increased the national debt and the deficit and thus imperiled the UK economy and seriously hampered its recovery. The Tories would have lost all credibility if they had stuck with the Labour approach, and the economy would have experienced further damage.

The Conservatives distinguished themselves from Labour by calling for public spending to be restrained, and it worked. In 2015, the Conservatives were re-elected based on a manifesto that continued to take a sensible approach to public spending.

It was therefore disappointing to see so many Labour-lite policies in the 2017 manifesto. Unfortunately, the electorate’s response to Conservative policies last year has not deterred May from pushing ahead with her things like an energy price cap, an interventionist industrial strategy, and frequent attacks on fat cats and big tech.

Moreover, calls from within the Conservative party to turn the public spending taps on to full blast again are growing louder. The logic is political, and the argument is that the Conservatives should at least attempt to compete with Labour on spending now the public finances are healthier.

This is wrong for two big reasons.

First, although progress has been made on eliminating the deficit and reducing the national debt, there is still a long way to go. The deficit has not been eliminated and the national debt is still too high. In fact, it is rising and is projected to reach 234 per cent of GDP by 2067. A high national debt endangers the UK’s economic resilience and places a burden on our children and grandchildren, who will have to pick up the bill for our lack of restraint. Moreover, excessive government spending and debt crowds out the private sector and hampers economic growth.

Secondly, it is out of keeping with what the public actually want. The fact that Labour under Jeremy Corbyn did less badly than predicted in the last election has confused the Conservatives and distracted them from a tried and tested recipe for success. The British people may be generous and want to see public services adequately funded, but they are also sensible and know that a country should not spend more than it earns. This was the key to the Conservative message from 2010 to 2016. Take the health budget for example. The NHS frequently comes top of people’s priorities in polls. However, recent polling revealed that voters understand that spending more money is not the answer.

The Conservatives will not win the next election if all they have to offer is watered down socialism. They should instead offer a credible and exciting fiscal plan which will benefit the economy and win votes.

They should start by cutting taxes both for individuals and for businesses as this will grow the economy, bring in more revenue to spend on essential public services, and benefit the poorest in society. The Conservatives did the right thing by increasing the personal allowance, meaning that the very lowest earners get to keep more of the money. The next step would be to increase it even further and to abolish national insurance contributions. The Tories will quickly realise that as soon as you let people keep more of their hard earned cash, you become much more popular.

The top rate of income tax should also be cut. Although it might not be immediately popular to give tax cuts to the richest, it will benefit the economy. There is a great deal of research showing that when taxes are cut, the economy benefits. Furthermore, this will also help to eliminate the deficit further and give the government more money to spend on public services. This is because the economic history of the UK and the US reveals that everytime the top rate of income tax is cut, there is an increase in revenue for the country’s Treasury. This is the Laffer curve in action, and it means that the government will be able to spend more money on the essential public services which people care about.

Corporation tax should also be cut. This will have the obvious benefit of attracting more businesses to the UK which will be important as we prepare to leave the EU. Again, this will be unpopular with the media to begin with, but it will actually benefit the poorest people in the country the most. When Donald Trump introduced his tax reforms there were lurid claims that 10,000 would die as a result. In reality, it resulted in companies passing on the savings to their employees. JP Morgan, Walmart, and Apple (to name just a few), have all increased the salaries and benefits of their lowest earners, making an immeasurable difference to their lives. Such a move in the UK by the Tories would increase the living standards of those on modest incomes and really help to tackle the cost of living crisis.

It should also take a more sensible approach to spending and allow the private sector to take the lead to meet the demands of what people actually want. It is patently absurd that the government blocks private investment in major infrastructure in Heathrow which would benefit the economy, while at the same time splurging billions of pounds of taxpayers money on the hugely unpopular white elephant that is HS2.

The evidence overwhelmingly demonstrates that excessive public spending is bad for the economy. For example, research conducted by Fournier and Johansson reveals that high public spending is associated with low economic growth. This is supported by other economists such as Slemrod and Myles.

Government spending is over 42 per cent of GDP. This is far too high given that research reveals that the optimal level is between 15 and 25 per cent of GDP. The government should commit to scrapping HS2 and the foreign aid budget. It should also slash unnecessary spending on various schemes and in government departments.

The recent news about the deficit should be welcomed. However, this is no time for the Conservatives to attempt to match the reckless spending plans of Corbyn. If the Conservative party wants to win the next election, grow the economy, and help the poorest people in the country, then it will let people keep more of their money by cutting taxes and stopping wasteful spending.

Ben Ramanauskas is a Policy Analyst at the Taxpayers' Alliance.