The case for a smaller state revisited

Conspicuously missing from the coming British general election will be a debate about the size of the state. An uneasy consensus rules that the present scope of activities is about right. The government spends or dispenses 40 per cent of the national income. That is quite a bit more than in 1960 but a lot less than it might have been had the Thatcher privatisations not happened. True, the Conservatives talk about shrinking the state but they are not willing to take political risks to do so.

One might suppose, therefore, that the supply of state services has reached a rough balance with the demand for them. But that is not true. Demand for education and healthcare rises faster than national earnings; the explosion in rights multiplies legally enforceable claims on public resources. Yet there is no corresponding willingness to pay higher taxes.

Governments have responded with a variety of shifty expedients. They have postponed promised spending to future years; they have used “stealth taxes”, “windfalls”, and even National Lottery proceeds to balance the books. But sooner or late the post-dated cheques will be cashed, and the revenue will become less “buoyant”, as people find new ways to evade unwanted imposts. This is not equilibrium, but the lull before the storm.

Some time in Labour’s probable second term, the debate about the “size of the state” will start again. What arguments should advocates of asmaller state then deploy?

They would start from a strong presumption in favour of individual liberty. In economic life this means freedom of choice. The moral case for free choice is closely linked to the advantages of decentralised decision-making and variety of life, as well as to the virtues of independence, enterprise and personal responsibility.

A distinction needs to be redrawn between things that people can do for themselves and those things that would not otherwise be done at all unless the state did them. Private enterprise will not provide national defence or a system of law and order; nor an efficient transport system, if recent experience is anything to go by. But we would have universities, schools, hospitals, houses, museums, art galleries, insurance schemes without a penny of public money being spent on them. In earlier times, these goods and services were provided by a mixture of private enterprise, philanthropy, and mutual self-help.

The principle that the state should buy “public goods” out of taxes, and citizens should buy “private goods” out of their own budgets, allows for some redistribution of buying power. Advocates of a smaller state should not shrink from this. People have always had a keen, though fluctuating, sense of what is fair. In modern times, the greatest perceived source of unfairness is being deprived, through the accident of birth, of a fair start in life, or, through circumstances beyond individual control, of the means to a decent life.

This remains a powerful argument for redistribution. But it has nothing to do with the guarantee of equal amounts of public resources to everyone irrespective of circumstances, as exemplified in the UK’s healthcare and school education systems. In practice, universal and uniform provision “free at point of use” simply leads to subsidies from the very rich and the very poor to the middle-classes. A lower tax take, whose proceeds were targeted on the least well-off, would be fairer to the poor, while enabling the better-off to pay a higher share of their medical and educational expenses out of their household budgets.

Paradoxically, the more seriously society takes the goal of equalising life-chances, the more unequal the distribution of public resources should be. The ethics of the matter are simple: those who can afford to pay for life’s necessaries should pay; and those who cannot should receive the means of payment. Abolishing subsidies to the middle-income groups, targeting public money on the least well-off, and reducing the overall tax burden makes a coherent package of reform that scores highly on all ethical criteria.

There are also powerful efficiency arguments for a smaller state. Evidence is accumulating that, at least for developed countries, the larger the share of national output absorbed by the state, the slower the rate of economic growth will be. This leaves us all poorer than we would otherwise be.

Drawing on the work of the economist Robert Barro, David Smith has estimated the effects on economic growth of increased public spending in 17 developed countries since 1960. Between 1960 and 1998 public spending in the UK as a share of gross domestic product increased by 8 percentage points.

Had the share stayed the same as in 1960, Britain’s national output would have been 54 per cent higher than it is today. This means that, assuming unchanged shares of public spending going to both areas, we would have #50bn a year more to spend on health and #7bn a year more on education. Two International Monetary Fund economists, Vito Tanzi and Ludger Schucknecht, conclude that “most of the important social and economic gains can be achieved with a drastically lower level of public spending than prevails today – not much higher than 30 per cent of GDP”.*

These arguments are not conclusive but are consistent with the intuitive view that beyond a certain point public spending and the taxes needed to finance it “crowd out” resources that would otherwise be available to make economies grow faster. With faster growth, more may be spent in absolute amounts on social services.

Finally, the advocates of a smaller state should proclaim – indeed, shout from the rooftops – that throwing extra hundreds of millions of pounds at services such as healthcare and education will not satisfy the public demand for better “outputs”. It is not that they do not need more money. But state-run bureaucracies have no in-built capacity for improvement. They are like giant sponges, which soak up all the money poured into them, while delivering the same standard of service as before. Only if users are able to buy the services they want in a competitive market will they get what they want. That is as true of healthcare and education as of any other “private” good.

These are the bare bones of the argument for a smaller state. It will start to resonate when the ethical and efficiency case for a leaner state meets the political impossibility of continuing with present arrangements.

* Cited in David Smith, Public Rags or Private Riches? to be published by Politeia on January 15, 2001.