Dr Eamonn Butler on the cost of government and how to reduce it.
The amount of money owed by the Government is huge and rising, says Eamonn Butler, so why aren’t we pursuing simple, effective ways to reduce the burden?
Today is Cost of Government Day. Average taxpayers in Britain now have to work almost half the year – 176 days – to pay their share of the cost of running Gordon Brown’s administration. Every penny we have earned since January 1 has gone to feed the state leviathan. It is only from today that, at last, you have started working for yourselves and your families.
More than five months of our servitude – from New Year until May 14 – were spent working to pay taxes, such as income tax, national insurance, council tax, VAT and many others including the notorious “stealth" taxes. But all that effort was still not enough to feed the monster, and when he had run out of our money, the Chancellor, Alistair Darling, had to borrow – at £20 million an hour – to pay his bills.So for the past six weeks, day in, day out, we have been working to fund that borrowing. No wonder Mervyn King, the governor of the Bank of England, warned yesterday of the “truly extraordinary" scale of deficits.
We have had to put in 10 days’ more work than last year in order to keep the Government afloat. It is not just the money that Brown and Darling borrowed to bail out the banks. It is the fact that every bit of public spending – national and local – is rising faster than taxpayers’ incomes. In 1999 – when Brown had finished with New Labour’s 1997 election pledge to match Conservative budgets – government spending was just 36 per cent of the nation’s income. Now it is a third more – 47.5 per cent this year – and rising.
Not that you can believe official figures. The International Monetary Fund thinks things will be far worse. Our national income will take a knock, and more people will be out of work and receiving benefits from the Government rather than paying it taxes. That makes it probable that public spending will be more than 50 per cent of our income – sending Cost of Government Day into July.
It amounts to a huge surge in the burden of government for those of us trying to earn a crust – twice that in France, and even more than when Britain was reeling from the oil-price shocks in the early 1970s. In fact, it’s not far off the 1940s, when at least we were paying off the cost of saving the world from Hitler.
But then Alistair Darling’s budget predictions have proved just as over-optimistic as his predecessor’s. In November 2008, despite all the drama in the banking industry, his forecasts seemed almost rosy. Now, he expects the Government’s budget shortfall this year and in 2010 to be four times that prediction, with 2011 and 2012 about five times bigger. The gap between what the Government expects to spend and what it actually brings in has risen five-fold, from £120 billion to £608 billion in the space of six months.
At that rate, according to the Institute for Fiscal Studies, it will take 23 years to return government borrowing to anything like normal levels – Gordon Brown’s famous “golden rule".
And of course, every year you borrow keeps adding to what you owe. Right now, the Government calculates that it owes a total of £2.2 trillion – about £144,000 per household. The figure has trebled since the bank bail-outs. Some traders are beginning to wonder if Britain can actually pay its debts. If they start pulling out, then we really are bust.
And the real picture is worse, because the Government does not record all its debts on the official books. Take all those new schools and hospitals being built on tick at a future cost equal to £5,600 per household; Network Rail’s borrowing, another £1,000 per household; nuclear decommissioning, another £2,750; those generous civil service pensions – a future cost of almost £50,000 per household; not to mention the state pension. Add those in, and the real national debt is twice the official figure.
Do not imagine that all this extra spending and borrowing are the fault of the financial crisis and the need to counter recession – interest payments, social benefits and suchlike. A good half of it is simply feeding the Government’s pre-election spending splurge.
And do not believe the spin that the Conservatives would make 10 per cent cuts to balance the books. They have pledged not to cut education, the NHS, or overseas aid, and they are stuck with the debt repayments and the EU’s demands; even if they cut 10 per cent off everything else, it amounts to just 3 per cent overall. They would be shrinking next year’s spending bill from £717 million to £695 million. That is still more than Labour has ever spent.
“What is prudence in the conduct of every private family can scarce be folly in that of a great kingdom," wrote Adam Smith. If your family had debts as big as the Government’s, you would know what you had to do:spend less or earn more – and preferably both.
The Government won’t earn more by putting up taxes. The Centre for Economic and Business Research estimates that the proposed 50 per cent top tax rate will make 25,000 people leave the UK, costing 140,000 jobs and reducing revenues. Britain is already overtaxed.
And the private sector has borne nearly the whole burden of the economic downturn. Wages have fallen, and unemployment is heading up to 3 million. But the public sector has been largely unaffected. That is why people are so angry when they see how much of their 176 days’ effort is simply wasted – or abused, as with MPs’ expenses.
The task is to reduce public expenditure without it showing. A freeze on spending and recruitment for a couple of years, then pegging it to inflation, would be surprisingly effective at re-balancing the books. (If spending since 1997 had risen no faster than inflation, we would be spending a third less than we do now, and could abolish income tax, VAT, and council tax entirely.)
Another useful move would be to publish online every cheque the Government signs, so we can see what it is spending and where. Private firms would be able to show what they could do more cheaply. And citizens could point out where they think their money is being scandalously wasted, as with the £300 million on departments’ service contracts, wasted through bad management, or the £200 million lost through bad procurement of hospital buildings.
Then there are the IT projects, such as the NHS records system, that are billions over budget and months or years late (the Department of Employment alone spent £59 million on a computer system that did not work). Exposing such wasteful incompetence would help eliminate it. And do we really need to spend tens of billions on ID cards?
Along with the Royal Mail, we can privatise the Tote, Channel 4, BBC Worldwide, air traffic control and various utilities, which would bring in a handy £20 billion. And we can get rid of central bureaucracy by measures like simply handing head teachers their bit of the budget and telling them to get on and spend it as they see fit, rather than as Whitehall bureaucrats think they should. The same could go for health – give the budget to patients or their doctors, not to layers of bureaucracy such as the strategic health authorities. And the quangos need to be culled again: they have grown in number, cost and power under Brown. For what gain?
Meanwhile, dozens of local government officers are now paid more than £100,000 and retire on generous index-linked pensions – something now almost unknown among the private-sector employees that work to support them. As this newspaper reported yesterday, PricewaterhouseCoopers claims that 96 per cent of companies regard final salary schemes as unsustainable.
About a third of Child Benefit is little more than pin-money for the middle classes. It should be given to the poorest. By taking everyone on the minimum wage out of tax entirely, we would see a stampede into work by those who we presently make better off on benefits.
Another huge saving would be to speed up the plans to raise the pension age, reflecting improvements in health and longevity. This is by far the largest spending change one could make. Yes, many people would not like it – though others would be delighted to avoid forced retirement at 65. But it would be hugely symbolic – a return to honesty in the public finances, and an end of the idea that we can all live at someone else’s expense. If this recession has taught us anything, it should have taught the politicians that.
Dr Eamonn Butler is director of the Adam Smith Institute and author of 'The Rotten State of Britain’ (Gibson Square Books)
Published in The Telegraph here