More on public spending

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more-on-public-spending

Further to my post below on public spending, there are of course many good reasons why ever-higher public spending is a bad thing. Chief among these is the deleterious effect it has on economic growth.

The obvious point here is that public spending requires either taxation or government borrowing (which is really just deferred taxation). Both of these take money away from the private sector, where it can be put to productive, wealth-creating use, and spends it in the public sector, where it isn't. Moreover, these taxes also affect behaviour – they blunt people's incentives to work and produce, to start businesses and create jobs. Put simply, the high taxes that the doctrine of 'ever-higher public spending' requires make as poorer as a nation than we otherwise would have been.

It isn't just about the taxes though. The under-appreciated flip-side of that coin is that public spending itself – regardless of the taxes needed to fund it – damages economic growth. The reason is crowding out. When the state spends money in a particular sector, it crowds out private businesses that would otherwise have been performing the same function, or providing the same services.

If we didn't have a nationalized healthcare system, for example, we could have a much more profitable, wealth-creating private healthcare sector. Rather than being a drain on the resources of the productive private sector economy, as it currently is, the provision of healthcare could itself contribute to the wealth of the nation. The same could be said of the universities – higher education being something in which Britain can and should have a commercial comparative advantage. And perhaps most obviously, this is true in Britain's creative and media industries – if it wasn't for the anachronistic dominance of the state broadcaster, the BBC, this industry would be very much vibrant and dynamic.

Politicians should be glad to cut public spending, and ought to be brave enough to make the arguments for it.