Brace yourself, Britain, for higher taxation

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Britain cannot aspire to continental European levels of public services with lower tax rates. Any British government has to confront that simple fact.

With the election over, the phoney debate about British public finances is also over. “Total managed expenditure” is a record of the British government’s discretionary spending. Between 1995-96 and 2000-01 it increased by 17 per cent, slightly ahead of inflation. But from 2000-01 to 2005-06, a time of lower general inflation, total managed expenditure rose by a massive 44 per cent. At the same time, the standard rate of value added tax remained the same, and headline income tax rates were reduced – although there were roughly offsetting increases in the less visible payroll tax (national insurance).

There was no shortage of independent comment on the unsustainability of this situation, but debate was drowned in a sea of self-congratulatory and misleading government statistics. The political opposition was ineffective against this barrage. There was little advantage in pointing out that the party could not last.

The party ended with the bankers begging at the back door. But the basic problem of British public finance was not caused by the banking crisis and recession, and will not be relieved by recovery from them. These events have certainly made things worse – we are likely to have borrowed at least £500bn extra on their account. But the initial debt level was manageable. The initial budgetary position was not.

Whatever action the new government takes, the underlying structural problem will get worse. Demography is not helpful – public spending is disproportionately on the old and the young, and the numbers of the old in particular are set to rise. Interest costs will increase sharply as both indebtedness and rates increase. Mechanisms of off-balance sheet financing were sold in London as well as Athens and the bills will come in. We do not know the size of the hole that needs to be filled. But it is between £50bn and £100bn a year, in the context of a national income of about £1,500bn.

The large rise in public spending from 2000-2006 went partly into people, and substantially into pay. It helped to renew the public infrastructure. Hospital waiting lists fell and tacky school buildings were rebuilt. But few people believe that the extra output matched the extra expenditure – and the Office of National Statistics, which is making valiant attempts to measure public sector productivity, does not.

The notion that the problem can be fixed by eliminating waste was part of the phoney debate. There is widespread waste in the public sector – as in the private – but if it were easy to eliminate it would already have been eliminated. When Labour was elected in 1997, the belief that better management would allow better services without a big rise in expenditure was sincerely held. The spending spree was a reaction to the reality that this had not happened.

Part of New Labour’s difficulty was that there was not much agreement on what better management would entail – and little has changed. It is easy to fulminate about bureaucracy and the need to concentrate on frontline services, but the National Health Service is under-managed not over-managed. Those with responsibility for running it lack authority, squeezed between Whitehall and the power of medical professionals, with the result that the calibre and morale of health service managers is low. The Tories aim to tackle very similar issues in education through decentralisation and greater autonomy. But even if their proposals are successful they will not lead to lower expenditure in a relevant time frame.

Big cuts in public expenditure in the next few years are feasible only if the public sector does much less, and the election campaign only confirms that there is no wide public appetite for that. So much of the rebalancing of public finances will come from higher taxes. If 20 per cent VAT is not a done deal as part of the agreement to establish a new government, then it will be soon afterwards. Higher taxes on income are on the way too. Britain cannot aspire to continental European levels of public services with lower tax rates. Any British government has to confront that simple fact.

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