By James Taylor Wednesday, 13 July 2011

Spending cuts should actually go much deeper, says IEA

The think-tank says the Government should cut another £215bn off public spending - so it can deliver tax cuts worth £7,500 to every UK household.

The big political argument at the moment (News Corp notwithstanding) is whether the Government is going too far, too fast with its plan to cut the deficit. So the latest report from the Institute of Economic Affairs think-tank offers a distinctly radical view: that the cuts package doesn't go nearly far enough. The IEA reckons the best way for the Government to foster growth is to put money back into people's pockets via tax cuts - and the best way of doing that is to cut back the state much more radically than the current plan entails. It's an interesting theory - but it'd be devilishly hard to deliver in practice...

In its report, entitled 'Sharper Axes, Lower Taxes', the IEA argues that the Comprehensive Spending Review was actually anything but. What was needed, it says, was a 'coherent, bottom-up analysis of government functions' - but what we got was a fudge, where some departments were omitted altogether and others were ‘salami-sliced'. The report's editor Professor Philip Booth compares the approach to 'a not-very-accomplished gardener who randomly prunes an overgrown flower bed not distinguishing between the weeds and the flowers'.

So the IEA has gone back to the drawing board and identified a further £215bn of cuts - including £44bn from health, £46.5bn from welfare and pensions, and £12bn from foreign aid. As you'll see, there are some controversial ideas in here: the IEA is proposing root-and-branch reform of the NHS (abolition, according to the Guardian), while cutting the amount of aid we send to the world's poorest countries. But the IEA argues that our current spending in these areas generally fails to have the desired effect. And by making these cuts, public spending would shrink to about 30% of the economy; this would allow the Government to reduce and simplify the taxation system, it says, which could leave the average household about £7,500 better off. (Although if they end up spending most of that on private health insurance, there might not be much left for kick-starting consumer spending.)

This might sound a bit left-field (or maybe right-field, in this instance). But the IEA reckons this plan would have widespread public support: according to a poll it’s just done with ComRes, 70% of the 2,000 adults surveyed were apparently in favour of a smaller state and lower taxes, well ahead of the 30% who favoured the current approach. That was particularly true of young people: more than two-thirds of under-35s believe the Government should be spending less than 35% of national income; not surprising, since they're the ones who'll be footing the bill for the baby-boomers' excesses.

Not everyone will agree with the IEA's conclusions. But it surely has a point that the Government missed a trick with the CSR - rather than taking the opportunity to re-imagine the role and size of the state, it's taken the easier option of lopping off the low-hanging fruit. On the other hand, we have a Coalition government, and that means compromise is the name of the game. The IEA may be right that tax cuts are the best route to growth, and we imagine George Osborne will be sympathetic to this in principle. But the chances of him getting radical policies like this past his Coalition partners and through Parliament - not to mention overcoming the inevitable backlash from the public sector - seem slim, to say the least.

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