A mighty wide topic

Martin Sandbu’s opening salvo: is there a long-term case for higher taxes?

By Nicholas Timmins, Public Policy Editor

This is – and has become more so with the additional contributions – a mighty wide topic. On the size of the state, this is not just a small ‘p’ political issue but one decided more by national culture rather any purely economic argument.

Scandinavian economies have operated, pretty successfully, with a much higher tax take to pay for a much more generous welfare state than say the US or UK. The UK’s problem has always been that British voters appear to want mainland European levels of social provision (health, education and benefit systems) while wanting to pay US levels of tax.

That equation doesn’t balance; and it helps explain why the UK’s public services so often struggle.

I’m with Chris Giles in that I doubt there is public appetite for severe retrenchment in the state’s role in funding (not necessarily supplying) health and education in the long term – however much there is going to be some short to medium term pain as the government’s books are balanced. But I am doubtful there is appetite for a sudden and sustained increase in the size of the welfare state in the UK. For a long time now,
the evidence has been that the electorate will stand for public spending taking around 40-42 per cent of GDP, but starts to rebel after that.

Over the medium term, demography (chiefly ageing) will lead to an increase in that percentage. But that is different to a desire for a permanent step change upward in the state’s role.

And while I agree there needs to be a marked degree of intergenerational fairness (some of the universal ‘add ons’ to pension provision in the UK, for example, are hard to justify) I am somewhat less gloomy than Krishna Guha about the “unaffordable” impact of an ageing society.

Essentially for two reasons. One is that the really gloomy picture assumes that nothing changes – that people continue to retire at 60 or 65 (often younger in recent decades). But given that on average people appear to be living longer and healthier rather than longer and sicker, working lives will not only have to get longer to pay for a longer old age, but it should be perfectly possible for that (on average) to happen. These changes are already taking place (slowly). State pension ages are rising. And, before the recession, one of the fastest growing parts of the work force in percentage terms (even if the numbers remain small) was those past state pension age, certainly in the UK and I think in the US. If people work even a few years longer to – so to speak – ‘pay in rather than take out’, that has a marked effect on pension, health care and other costs.

The second reason is economic growth. Assuming that it returns and continues, the cake from which the state is taking taxes gets progressively bigger. So a larger share can be spent on health, or pensions, or social care while still leaving more real terms money to be spent on everything else. Essentially that is what has happened in recent decades. Over the past 40 years spending on health, for example, has doubled in many industrialised countries from 5 per cent to 10 per cent of GDP, but economies have grown at least as fast or faster so the higher health spending has proved “affordable”. Assuming both these things happen (longer working lives and economic growth), ageing will indeed add several, possibly quite a few, percentage points to public spending over a very long period; but if that proves only to be only a larger share of a much larger cake, that should not be a problem. Of course, if neither of these things happen, it will be. A big one.


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