England

The United Kingdom and the Benefits of Spending Restraint

When I debate one of my leftist friends about deficits, it’s often a strange experience because none of us actually care that much about red ink.

I’m motivated instead by a desire to shrink the burden of government spending, so I argue for spending restraint rather than tax hikes that would “feed the beast.”

And folks on the left want bigger government, so they argue for tax hikes to enable more spending and redistribution.

I feel that I have an advantage in these debates, though, because I share my table of nations that have achieved great results when nominal spending grows by less than 2 percent per year.

The table shows that nations practicing spending restraint for multi-year periods reduce the problem of excessive government and also address the symptom of red ink.

I then ask my leftist buddies to please share their table showing nations that got good results from tax increases. And the response is…awkward silence, followed by attempts to change the subject. I often think you can even hear crickets chirping in the background.

I point this out because I now have another nation to add to my collection.

From the start of last decade up through the 2009-2010 fiscal year, government spending in the United Kingdom grew by 7.1 percent annually, far faster than the growth of the economy’s productive sector. As a result, an ever-greater share of the private economy was being diverted to politicians and bureaucrats.

Beginning with the 2010-2011 fiscal year, however, officials started complying with my Golden Rule and outlays since then have grown by an average of 1.6 percent per year.

Getting King John To Sign Magna Carta Was Only Half The Battle

The very day King John pledged to uphold Magna Carta, June 20, 1215, he asked Pope Innocent III to annul it.  The pope replied, “We utterly reject and condemn this settlement and under threat of excommunication we order that the king should not dare to observe it and that the barons and their associates should not require it to be observed.”

So, John reneged on his agreement with the barons, they rebelled and formed an alliance with King Philip II of France who prepared to invade England.  Before long, the French Prince Louis entered London, and the French controlled castles throughout England.  The English Church, however, backed John and refused to crown Lewis as England’s king. 

John fled from his pursuers, but somewhere along the line he contracted dysentery and was dying.  He appointed 13 executors including William Marshal who was among the most revered knights in England.  John died on October 19, 1216,  and his nine-year-old son was hastily crowned Henry III.  Because he was under-age, Marshal formed a regency government.  Although Marshal was able to seize an important English castle from the French, the civil war was substantially stalemated.

With John gone, the rebel barons found themselves in an awkward position – their alliance with foreigners who occupied England.  Patriotic English wanted to get the French out.  Fortunately, Prince Louis was happy to collect a bribe, and soon the French went home.

Regent Marshal recognized that there was more likely to be domestic peace if some fundamental legal issues were resolved and that consequently John’s repudiation of Magna Carta must be reversed.   So Marshal reviewed the document, made some cuts, and reissued Magna Carta in late 1216.   Among the cuts was paragraph 61 about the committee of 25 barons who would monitor the king’s compliance with Magna Carta and, if necessary, try to enforce it.  Perhaps less important than those words was the fact that the barons had demonstrated their willingness to use force against a tyrannical king.

Another “Oops” Moment for Paul Krugman

I’m tempted to feel a certain degree of sympathy for Paul Krugman.

As a leading proponent of the notion that bigger government stimulates growth (a.k.a., Keynesian economics), he’s in the rather difficult position of rationalizing why the economy was stagnant when Obama first took office and the burden of government spending was rising.

And he also has to somehow explain why the economy is now doing better at a time when the fiscal burden of government is declining.

But you have to give him credit for creativity. Writing in the New York Times, he attempts to square the circle.

Let’s start with his explanation for results in the United States.

…in America we haven’t had an official, declared policy of fiscal austerity — but we’ve nonetheless had plenty of austerity in practice, thanks to the federal sequester and sharp cuts by state and local governments.

If you define “austerity” as spending restraint, Krugman is right. Overall government spending has barely increased in recent years.

But then Krugman wants us to believe that there’s been a meaningful change in fiscal policy in the past year or so. Supposedly there’s been less so-called austerity and this explains why the economy is doing better.

The good news is that we…seem to have stopped tightening the screws: Public spending isn’t surging, but at least it has stopped falling. And the economy is doing much better as a result. We are finally starting to see the kind of growth, in employment and G.D.P., that we should have been seeing all along… What held us back was unprecedented public-sector austerity…now that this de facto austerity is easing, the economy is perking up.

But where’s his evidence? Whether you look at OMB data, IMF data, or OECD data, all those sources show that overall government spending has been steadily shrinking as a share of GDP ever since 2009.

Progress on the Laffer Curve*

The title of this piece has an asterisk because, unfortunately, we’re not talking about progress on the Laffer Curve in the United States.

Instead, we’re discussing today how lawmakers in other nations are beginning to recognize that it’s absurdly inaccurate to predict the revenue impact of changes in tax rates without also trying to measure what happens to taxable income (if you want a short tutorial on the Laffer Curve, click here).

But I’m a firm believer that policies in other nations (for better or worse) are a very persuasive form of real-world evidence. Simply stated, if you’re trying to convince a politician that a certain policy is worth pursuing, you’ll have a much greater chance of success if you can point to tangible examples of how it has been successful.

That’s why I cite Hong Kong and Singapore as examples of why free markets and small government are the best recipe for prosperity. It’s also why I use nations such as New Zealand, Canada, and Estonia when arguing for a lower burden of government spending.

And it’s why I’m quite encouraged that even the squishy Tory-Liberal coalition government in the United Kingdom has begun to acknowledge that the Laffer Curve should be part of the analysis when making major changes in taxation.

UK Laffer CurveI don’t know whether that’s because they learned a lesson from the disastrous failure of Gordon Brown’s class-warfare tax hike, or whether they feel they should do something good to compensate for bad tax policies they’re pursuing in other areas, but I’m not going to quibble when politicians finally begin to move in the right direction.

 

The Wall Street Journal opines that this is a very worthwhile development.

Chancellor of the Exchequer George Osborne has cut Britain’s corporate tax rate to 22% from 28% since taking office in 2010, with a further cut to 20% due in 2015. On paper, these tax cuts were predicted to “cost” Her Majesty’s Treasury some £7.8 billion a year when fully phased in. But Mr. Osborne asked his department to figure out how much additional revenue would be generated by the higher investment, wages and productivity made possible by leaving that money in private hands.

By the way, I can’t resist a bit of nit-picking at this point. The increases in investment, wages, and productivity all occur because the marginal corporate tax rate is reduced, not because more money is in private hands.

I’m all in favor of leaving more money in private hands, but you get more growth when you change relative prices to make productive behavior more rewarding. And this happens when you reduce the tax code’s penalty on work compared to leisure and when you lower the tax on saving and investment compared to consumption.

Margaret Thatcher and the Battle of the 364 Keynesians

With the death of Margaret Thatcher, and the ensuing profusion of commentary on her legacy, it is worth looking back at an overlooked chapter in the Thatcher story. I am referring to her 1981 showdown with the Keynesian establishment—a showdown that the Iron Lady won handily. Before getting caught up with the phony “austerity vs. fiscal stimulus” debate, the chattering classes should take note of how Mrs. Thatcher debunked the Keynesian “fiscal factoid.”

A Victory for the Laffer Curve, a Defeat for England’s Economy

A new study from the Adam Smith Institute in the United Kingdom provides overwhelming evidence that class-warfare tax policy is grossly misguided and self-destructive. The authors examine the likely impact of the 10-percentage point increase in the top income tax rate, which was imposed as an election-year stunt by former prime minister Gordon Brown and then kept in place by his feckless successor, David Cameron.

Hey, UK: Meet the New Boss, Same as the Old Boss

As the chart below indicates, the United Kingdom has a large budget deficit solely because government spending has increased to record levels (OECD data). Unfortunately, the new Tory-Liberal coalition government has decided that taxpayers should be punished for all the over-spending that occurred when the Labor government was in charge.

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