The curse of living in interesting times

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We Can hear it already, but it will become far louder come Tuesday. For the main argument over the Budget will be about the balance between tax cuts and public spending. It will, of course, also be the central debate in the forthcoming general election. What balance do we really, honestly want? Not what we say we want (because it seems we lie) but what we really want?

This might seem a big enough question, but step back a moment, and there is surely an even bigger one behind. It is not just a tax and spend matter; it's more about the appropriate boundaries of the state. Public spending or taxation as a proportion of gross domestic product (GDP) are important and convenient measures of that. But there are others: levels of regulation, willingness to abide by such regulation, government-inspired pressures on social behaviour, and so on.

Clearly a sea change has taken place in attitudes to the size of the state in areas of commercial activity: for example, very few people now are in favour of renationalising airlines or telecommunications companies. Listening to the rhetoric of the two main parties, though there may be support for higher spending, neither party is openly advocating higher taxation. But beyond all this, there is surely a wider, though less well- defined change taking place in the attitude of citizens to their relationships with the state: their perception of the state's obligations to them and their duties to it.

A new study by the Royal Institute for International Affairs, Unsettled Times, has just brought this thought home. The study was prepared for the Chatham House Forum, a group from business and government which peers into the future. The theme of the study is the general economic outlook for the world, and it sets out three scenarios to the year 2015.

These are quite interesting in themselves. One, called "Faster, Faster", suggests that global competition will continue to increase and while competent nations will prosper, those who cannot keep up will suffer disproportionately. Another, called "Post-Industrial", involves the societies exploiting technology in local or regional groups, rather than through a true global economy. Competition is less vigorous and the moderately competent do reasonably well. Finally there is "Rough Neighbours", where countries find that rapid economic change puts great strains on social structures and protectionism. Antagonistic trade blocs and economic disruption follow.

Perhaps more interesting than the scenarios themselves, which are really just a discipline on thinking about the future rather than projected outcomes, are the implications for the state. The idea that as countries get richer their citizens change their attitude to the state is shown on the right- hand chart. Some might disagree with the actual positions of the various countries. Singapore citizens, it could be argued, see the state as an enabling agency to give them a better standard of living and would bridle at the idea that they were to some extent still its "servants". In any case, Singapore ought to be higher up the income scale and, for that matter, Russia lower. But you can see the point. Our perceptions of the role of the state are gradually changing as we get richer.

The RIIA paper describes this change in our expectations. Thus we expect a reasonable level of financial competence: that the state should be a decent steward of the money it takes from us. We expect it to regulate and legislate in an effective manner and to be open in its decision-making. We expect it to balance our political objectives and mediate between our different aims. And we expect it to provide the broad infrastructure of our lives: the physical infrastructure and the welfare systems, but some tacit values, too.

This is an enormous range of requirements and costs a lot of money. But since the mid-1970s taxpayers in most countries have failed to supply sufficient tax revenue to match these needs, with the result that deficits have exploded in size. This is not particularly a criticism of Britain, which until 1992 had done a good job of containing deficits, and is still near the bottom of the overall debt league. But for members of the Organisation for Economic Cooperation and Development, the effect is to transfer the burden of taxation on to future generations. The RIIA has dug out two figures that I had not previously seen. One is that the average middle- aged worker today in an OECD country will draw$100,000 (pounds 59,630) more in benefits than he or she paid in tax during a working lifetime. The other is that young workers will have to pay $200,000 to $300,000 more in taxation during their working lifetime than they will receive in the early part of the next century.

Another way of looking at the longer-term implications of this imbalance between spending and taxation is to see what would happen on present trends to public sector debt. The chart on the left does that for the United States, showing a projection of debt reaching 250 per cent of GDP in 2030. Now that is not going to happen. It is not conceivable that the US debt could reach twice the level it reached at the end of the Second World War. But for it not to happen requires painful policy changes.

The logical conclusion ought to be that young voters demand that governments push through these changes asap: that they should stop running deficits and start building surpluses. But one hears nothing of that in political debate here, hardly anything in the rest of Europe where fiscal policy is discussed entirely in the Maastricht context, and only recently have issues of inter-generational equity begun to surface in the US.

This might seem just a tax and spend issue and in one sense it is. But inter-generational equity is surely also a bigger issue about the proper role of the state. It surely cannot be a proper role to take money from one generation and give it to another.

Under the "Faster, Faster" scenario noted above, governments will be under great pressure to perform better, just as companies are. Their performance will be watched by the markets, which will be "scrutinising events with lidless eyes".

Under the "Post-Industrial" scenario, they will be required to do much the same, but be under less overall pressure to perform. For example, regulation can be trimmed and clipped to be appropriate to local needs rather than having to be optimal for large areas.

Under "Rough Neighbours" the poorer economic performance means that the pressures on government become extreme. Power gets drawn to the centre, taxation goes up and blame is almost certainly distributed unfairly. Not good.

There is a common theme under all of these scenarios: more pressure on government. It is greatest in one and three, but even in a relatively benign, localised world, demands rise and resources to meet those demands are tight. The outlook, then, is one in which governments are in for a tough time. The constant pressure to improve performance to which people in the private sector (or at least its more efficient parts) have become accustomed will spread throughout the public sector.

As a result we will see a continuing revolution, lasting perhaps a generation, in the way governments do their business. The frontiers will be for different countries to determine through the political process, but always under the eye of the accountants. Where a service can be provided more efficiently through the market economy, expect it to go that way. The overall responsibility will remain with the state - I don't think there is any question about that - but how the state carries out its functions will be a swirl of experiment, revolution and counter-revolution. It will be exciting. Just do not expect it to be comfortable.