Public spending in Britain takes a little more than 40 per cent of national output, low by European standards but high by the standards of the US, Japan and especially the "tiger" economies of East Asia. That means that 40 per cent of the economic decisions are taken not by us, but by "them". We pay enormous attention to the decisions we take - whether we can afford to go out to the theatre, have an overseas holiday, move house - wondering whether the money will be well spent. By contrast, we pay hardly any attention to the decisions taken by them - whether to buy new fighter planes, increase teacher salaries, pay more to the unemployed - the very decisions determined by the budgetary process. We do not connect, except at the vaguest level, the amount of money taken away from us and the way in which this is spent. We do not even have the information to connect, for we have very little idea of how much revenue various taxes bring in, and even less of how much things bought by the public sector really cost. While the tax side of the equation does have a certain obvious interest, the spending side is very, very boring.
This is dreadful. If we think of taxation as disappearing into some sort of black hole and complain that there are never enough funds to provide half-decent schools and hospitals, then we are questioning the very basis of our contract with the state. The climate of complaint is completely understandable, but it is deeply corrosive. For the moment we may be able to convince ourselves that if the other side got in it would all be different. But it won't, because there will be no more money for public services if there is no more money taken in taxes. Result: we will be doubly disappointed and our democracy will be further undermined.
So what is to be done? There are two broad ways forward. One is to connect taxation to public spending item by item. The other is for the state to retain the overall responsibility for public services but encourage a shift to paying for these by a combination of savings and insurance.
The economists' ugly word for tying particular taxes to particular types of spending is "hypothecation". The Treasury, not just ours but treasuries all around the world, hate it. They hate it partly because it strips away their authority, for ordinary people might have different ideas about the level and allocation of taxation to the boffins in Whitehall. Politicians react in much the same way.
There are, however, more respectable reasons for resisting too much hypothecation. For example, many public spending decisions have very long tails, with decisions taken now affecting spending in 20 or more years' time. So the people making the spending decision will not necessarily be those paying for it. Such a system probably also over-weights the importance of lobby groups: articulate and well organised groups would probably find it easier to impose taxes and allocate spending than the less organised, whose interests would suffer. And there are some economic activities, like motoring, which do generate large revenues over and above the funds needed to maintain that activity. Give back to the motoring interest more of the money raised in fuel and road tax and we might have a great road network, but we would not have so much left over to fund general public sector needs.
Nevertheless, connecting taxation to spending is one way of increasing its legitimacy, and there are powerful reasons for trying to show people where their money does go, and allowing them to have some say in it. If some taxes were specifically used to fund particular objectives, then we could gauge the support for them. The German "solidarity tax", an additional income tax levied on Germans to transfer funds to the former East Germany, is a good example - even if it makes East Germans a bit less popular.
The other way forward is to connect what people pay directly to what they receive. The obvious example here is the pension system: if the pension portion of people's contribution to National Insurance were invested on their behalf, and they received a statement each year of the return on this fund and the value of accumulated pension rights, National Insurance would cease to seem a tax and be a genuine savings/insurance scheme. The transfer of funds to the present generation of pensioners would be explicit. We would know what we were buying, and we would trust it.
A saving/insurance system makes redistribution from the haves to the have-nots more explicit, and thus maybe harder. But in practice the tax system does not redistribute very much at the moment; and in so far as it does, it is taking money from people at one stage of their life and giving it back to them at another. In fact, if redistribution were made explicit rather than covert, people could make an honest decision about the extent to which they did want a redistributive tax system.
That is the word: honest. People are not stupid. They know that higher public spending means higher taxes. They need to feel they are getting value for money. They need honesty in taxation, honesty in spending. They mustn't feel impotent in the face of the state. And they mustn't be bored by the core decisions of our democracy.Reuse content