An interesting if not wholly entire paper looking at how much government is actually necessary. The answer is, which will surprise those to the left of us, not just more than we have. In fact, about 35% of GDP is all that is necessary. Which is, amazingly, about the amount we have and rather less than many of our soon to be no longer confreres in the European Union.
Governments across the rich world squander billions every year on inefficient spending and could slash budgets without harming either services or the economy, new research has found.
Good performance in almost every area, from health and education to infrastructure and economic performance, can be achieved on relatively low levels of spending.
Efficient government can provide the best of both worlds with a budget amounting to less than 35pc of GDP, according to a report from EconPol Europe, a network of universities across the continent.
That paper is here. The reason the paper’s not wholly entire is that it makes certain unwarranted assumptions. Government should be responsible for the financing of health care and education for example. As Singapore shows about health care this isn’t necessary. As most poor countries show with their entirely dire public education systems, that may not even be desirable.
It’s also true that we can have an entirely functioning state - even a generous one - with more like 15 to 20% of GDP. Everything beyond that is tax and redistribution rather than the provision of goods and services. We can even provide a basic safety net within that 20%.
But one point that leaps out at us:
Institutions matter in particular. A country with an effective and less distortionary tax system can finance a bigger government at the same cost as another country might with a less efficient tax system (OECD, 2018). Countries with well-functioning institutions and trust in government can afford a larger government than a country with weak institutions and a tendency to corruption and rent seeking.
As so often we’ve things operating in opposite directions and the trick is to find the optimal point. We’re particularly taken with that “less distortionary tax system”. Having one of those means you can have more government - if that’s what you wish as we don’t - for the same loss in wealth and income caused by having the tax take to pay for more government. Which is interesting.
For we know that wealth taxes, say, are distortionary. We know that high income tax rates are distortionary. We also know that land value taxation is less so, that consumption taxation like a VAT is less so. This is just the old point about the different deadweight costs of varied taxes again. From which we also know that things like a financial transactions tax are hugely distortionary.
That is, if you actually do desire that larger state you need to be arguing against an FTT, wealth and high rates of income taxation. In favour of more VAT, more land taxation. Which isn’t, of course, the way the argument does run. Which means that those engaging in that demand for a larger state through such forms of taxation are misguided, inconsistent or plain just ignorant.