The low dishonesty of the Budget debate
Tuesday 29 August 1995
So we have the "tax cuts without reduced services" party, or the "better services without higher taxes" party - described by their opponents as the "welfare state dismantled and taxes up" and "taxes up for no purpose" parties, respectively. It makes no sense, but we shall have plenty of it between now and the next election.
Taxation and public spending are where openness and realism seem least to be found, where impossible demands are regularly made. Pity the poor Chancellor of the Exchequer as he spends his late summer trying to work out what to do in the Budget this November.
Kenneth Clarke is a man clearly committed to many public services. He is publicly committed to reducing government borrowing. But he is also a member of a party committed to cutting taxes.
This Budget will be a tough one for Mr Clarke. Although the tax year is still young, the signs are that tax revenues are lower than forecast, so he cannot appeal to overflowing coffers as an excuse for cutting taxes. The right of his party is strident in its calls for tax cuts and there is an election due within two years. His party's reputation for tax cutting was badly damaged by the massive increases both he and Norman Lamont announced in 1993. What will he do?
The crucial point is that he will surely make a decision that is essentially political, not economic. There simply is no scope with the public finances as they are now to make a significant reduction in net taxation. The 5p off the basic rate of income tax talked about by the extreme tax-cutters would raise borrowing by too much, or require cuts in services on such a scale that it just isn't a runner for implementation next year.
If he wants to make a gesture, cutting a penny or two off the basic rate of income tax won't be a problem. Cutting the basic rate from 25 to 24 would only cost pounds l.6bn, out of total revenue of close to pounds 300bn, well within the margin for error on forecasting revenue, spending or borrowing. And if he's feeling prudent, Mr Clarke could reduce the net cost with judicious small and obscure tax increases and spending cuts elsewhere.
Such a move might or might not re-establish the Conservatives as the party of low taxation. Perhaps that will have to wait until November 1996. At least.
But the truth is that the inevitable theatre and rhetoric that will surround the Budget will obscure difficult choices neither large party seems to want to face. The most depressing feature of John Redwood's campaign for the Conservative Party leadership was the suggestion taxes could be cut substantially while services could be maintained, and even made more generous. We might reasonably have expected the free-market right to have recognised the consequences of the simple truth that less tax means less public spending.
On the left, the same fears are present. The idea of offering a combination of higher taxes to fund better services seems now to be a historical artefact. Thus far the line against spending commitments has mainly been held. There is no Labour shadow cabinet equivalent of John Redwood running an explicit "better services without tax increases" line, but there has been no promise of extra money for services, either.
On both sides our politicians seem to be tiptoeing around the truth they dare not name, which is that we simply cannot go on as we are. Taxes must rise or services must be reshaped. There is no easy status quo.
For the whole of the last century, until the second half of the 1970s, the share of government spending in the national economy grew steadily. Then came the backlash and talk from Thatcher, Reagan et al about slashing the state. That scheme failed, the growth of government here and elsewhere slowed, but did no more than stabilise, and in many cases continued to grow.
The forces driving public spending growth are powerful. First there is demography: there are twice as many people over retirement age now as there were just after the war. Second, technology matters, especially in health. Technological change saves and transforms lives, but it is expensive. Third, as we become better off, individually and as a nation, we want to spend more resources on retirement, health and our children's education. The share of national consumption taken by these goods and services will continue to rise, whether in the public or private sector.
And fourth, economic and social change, bringing higher unemployment and more lone parents, for example, are adding pressure on public spending. So the hopes that we can have either lower taxation with the same services, or better services without more taxation, are forlorn.
Those promising either tend to look for a saviour in two places. First, they say they will make great efficiency savings. Of course such savings can and should be made, but they are not the answer. Even in a complex and expensive area like social security, which accounts for close to a third of all public spending, administrative costs account for little more than 3 per cent of the total.
Second, the funds are promised from a better economic performance. Leaving aside scepticism about the likelihood of improved performance, such growth would anyway not be the answer. The incomes we want in retirement are linked to those we had in work, so if growth accelerates, so will our desire for retirement income. Likewise, if standards of living rise we will want still better education for our children; still more sophisticated health care.
What we seem to be offered is a world where the size of government is roughly constant, because no one dares propose either real tax increases or real spending cuts. But that is no status quo. With all the upward pressures, no extra revenues means cuts and reforms somewhere. The problem with this is that we are simply not having a debate, facing the choices that are effectively being made. The flat rate state pension has now fallen so far relative to living standards that it seems even the Labour Party will not offer to increase it. Fees for higher education seem to be well on the way. Private dentistry is a common reality. It is possible that all these are the best choices, and that Labour would do the same as the Government. But there is no open public debate. In public, our leaders seems only willing to promise no-loser, revenue-neutral reforms. The trouble is, there are none.
The public sector has changed radically in the last century, and will go on doing so. All such changes have made some people better off and some worse off. This is inevitable, and hardly wicked. But we are old enough to be told who will gain, and who will pay. What will the public sector do? Neither Mr. Clarke nor Gordon Brown will be keen to tell us, because some of their supporters will be losers. Life is like that.
Andrew Dilnot is director of the Institute for Fiscal Studies.
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