Friday, April 09, 2010

State Dependency Vs Economic Growth

Governments can never deliver prosperity

The dividing lines are suddenly becoming clearer. Labour is offering a continuation of the high spending high taxing policies pursued over the last 13 years, and the Tories are finally starting to spell out the alternative.

The argument over National Insurance Contributions (NICs) precisely captures the point.

Labour says that the increase in NICs is necessary to finance £6bn extra public spending. They say that cutting that spending will cost tens of thousands of public sector jobs (now estimated at 40,000), and cause untold damage to public services.

The Tories say that increasing NICs will destroy even more jobs (it could be half a million - see this blog). Moreover, the £6bn spending cut will not damage public services because it will be deliverable from cutting costs not services. After all, it's less than 1% of total public spending.

The debate is a very familiar one: do we think that public spending is required to shore up the economy, or do we trust the private sector to do the job?

Socialists have always mistrusted the market. NuLab accepted it under sufferance, but only so long as we were in the long boom. Once we hit the bust they immediately reverted to type, nationalising the banks and stoking up public spending even further than they'd already done.

The problem with that approach is the same as it's always been. By increasing the size of the public sector, the government squeezes out the market sector. And it's the market sector that delivers long-term sustainable growth.

Now, according to Labour, that's not what they intend. According to them, they'll cut the public sector back down again as soon as the time is right - as soon as the economy has returned back to self-sustaining growth. In other words, they want us to believe this is simply a timing issue.

But the real world isn't like that. In the real world, once the public sector has expanded, it's the devil's own job to cut it back down to size (aka the ratchet effect). And once private sector employers have laid off the staff to pay for the additional taxes, it's the devil's own job to get them to rehire - especially if the economy is bowed down under massive government debts.

The net result is that the economy becomes even more dependent on state support, and even less able to generate growth and prosperity for the future.

Just in case you'd forgotten, the key to long-term prosperity is productivity growth - delivering more output with fewer inputs. And on that measure - despite constant claims about so-called efficiency savings - the public sector has turned in a truly abysmal performance.

As we blogged here, the ONS estimates that during Labour's first decade, public sector productivity fell by between 0.3% and 1% pa (the smaller fall depends on a number of tenuous assumptions such as counting the increased passes in our dumbed-down state exams as, ahem, "quality improvements").

Over the same period, private sector productivity increased by 2.2% pa.

It's no wonder our business leaders are up in arms. They're the ones who've had to struggle and sweat and sack surplus staff in order to deliver that productivity growth, while public sector managers have just sat on their spotty behinds avoiding any such tough decisions. Why shouldn't the public sector start feeling the heat? There must be millions of ways to deliver productivity growth without torching services.

Consider this. If the public sector could match the private sector's productivity record, within 5 years we'd be saving around £70-80bn pa. And the cumulative saving would be about £200bn, straight off our soaring debt mountain.

At the same time, we'd be releasing resources for redeployment in the private sector - the bit that earns Britain's way in the world, generates the growth, and ultimately pays all the taxes.

What's that? Redundant public sector employees would be fit for nothing other than joining the dole queue?

Listen, Tyler successfully made the transition. And according to Mrs T, if Tyler could do it, anyone can.

PS Driving along yesterday, Tyler listened to a depressing report from the Walton area of Liverpool (see vid above for Jackson tour). It's an area that has been totally whacked by welfare dependency. Unemployment is high, crime is rife, and hopelessness pervades. During the discussion, some prof was asked what we should do? Was more money needed? He said money was already being spent - lots of it - but it hadn't done the trick. What was actually needed was small business entrepreneurs to create jobs. Unfortunately Liverpool doesn't have many of them, and it was difficult to see how they could be created. Well, screamed Tyler at the radio, I've got an idea. Cut taxes on small businesses in Liverpool (and Hull and various other apparent basket cases) to zero. Start here. And while you're at it, see this excellent DT article by Fraser Nelson.

1 comment:

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