ОБРАЗОВТЕЛЬНОЕ УЧРЕЖДЕНИЕ ПРОФСОЮЗОВ ВЫСШЕГО ОБРАЗОВАНИЯ
АКАДЕМИЯ ТРУДА И СОЦИАЛЬНЫХ ОТНОШЕНИЙ
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Sharper Axes, Lower Taxes: Big Steps to a Smaller State by Philip Booth
(Грамотная бюджетная политика приводит к снижению налоговых ставок: Большие шаги на пути развития малого государства)
Выполнил аспирант кафедры
мировой экономики и международных финансов
1-го года обучения
Федотов Денис Олегович
Проверила к.п.н., профессор
Матвеева Ирина Владимировна
Москва 2015 г.
Contents
Summary………………………………………………………………………3
The original text…….………………………………………………………..15
Translation……………………………………………………………………27
Glossary………………………………………………………………………40
References…………………………………………………………………….49
Summary
This monograph consists of 5 parts. In the first chapter named «Economic growth, government spending and taxation» told that there is now a huge and rapidly expanding literature on ‘endogenous growth’. In this literature certain ingredients ‘enter the production function’ – that is contributed to the generation of output – which are they enhanced in their effects by the extra output. Hence growth may enter a ‘self-feeding’ phase when these elements are present or increased beyond a certain threshold. Such elements are said to include education or personal knowledge, public infrastructure and research and development (R&D).
In this chapter was made an analysis of two rival models of the effects of public spending: the ‘activist’, according to which spending raises growth via its effects in subsidising R&D, and the ‘incentivist’, according to which it reduces it by penalising incentives through higher taxes. Author have sketched out the rival models and estimated the relationships using sophisticated statistical techniques. We have found that there appears to be no identifiable effect of R&D and other capital subsidies on growth but that there is an effect of taxation depressing growth – in this we join a growing literature that finds similar negative tax effects on growth. Only if people assume that growth differences between countries are ‘fixed’ in nature – that is, we assume that owing to climate or inherent ethnic characteristics some countries grow faster than others, an assumption that we would reject – does this effect become poorly determined and insignificant. Even in these circumstances, the effect remains, if somewhat reduced in size. Our theories suggest that no control variables should be added (for initial GDP per capita, education per head, capital/ GDP or investment/GDP) to either the activist or the incentivist model, but even if we do add such control variables they do not undermine the basic results.
Given the models that were used, there is strong evidence of a negative effect of tax on growth. A 10 percent reduction in the tax take as a percentage of national income from the rate proposed by the coalition at the end of the Comprehensive Spending Review period of 40 per cent of national income might add around 0.7 per cent to the annual growth rate if the current sustainable growth rate is 2 per cent per annum.2 increasing public spending on investment and R&D, on the other hand, would have a minimal effect on the growth rate. It would appear that the surest way to increase economic growth is to reduce government spending and taxation.
Also one of the most disappointing aspects of the May 2010 election was that all three major parties treated high government spending as having no adverse consequences for the wider economy. This meant that the electorate had to choose between three, almost identical, fiscal ‘Ponzi’ schemes and that the coalition has no moral platform from which to justify the much-needed spending retrenchment.
The retrenchment was needed for several reasons, not least of which is that one effect of Labour’s pre-2010 spending binge may have been to slow the growth of UK productive potential to a euro-sclerotic 1.5 per cent or so each year. The need now is to rebalance the economy by nurturing the private sector. Otherwise the UK’s ability to generate wealth, tax receipts and genuine employment opportunities is likely to become vanishingly small.
Indeed, the spending burden in Britain is so high that the economy is probably on the wrong side of the aggregate Laffer curve, particularly where taxes such as VAT are concerned (Smith, 2011b). Attempts to tax a way out of the current fiscal crisis are likely to lead to an exacerbated budget deficit as private activity falls away and joblessness rises. The coalition seems to be blissfully unaware of this. There should have been no tax increases in the fiscal consolidation plans. Simulations using the BEF forecasting model confirm that the hike in VAt to 20 per cent was pointlessly damaging, leading to higher unemployment, reduced national output and a larger budget deficit than would have been the case otherwise. This does not mean that alternative tax increases would not have been at least as harmful, particularly the labour opposition’s proposal that employer’s NICs should have been raised instead. Direct surcharges on employment costs represent the most damaging tax of all and are an impost where the adverse Laffer-curve effects appear to be indisputable.
Simulations carried out on the BEF model strongly suggest that the ‘best-buy’ policy package would have been to cut spending more aggressively and not to raise taxes in the way that the coalition has done. This would have maximised the virtuous-circle ‘crowding-in’ effects of the policy stance. The institutional separation of the OBR from the treasury, however, makes it difficult for the Chancellor to evaluate alternative tax and spending options using a properly specified macroeconomic model. There are major flaws in the forecasting methodology inherited by the OBR from HM treasury. These flaws give rise to an undue bias in favour of higher taxes rather than expenditure cuts.
There have been several interesting studies of historic fiscal consolidations published since the literature was reviewed in Smith (2006). The subsequent studies by Lilico et al. (2009) and Reading et al. (2010) can both be recommended. What is surprising, however, is that more attention has not been paid to the successful rolling back of the state under Winston Churchill’s post-war administration in the 1950s.3 this government took a heavily socialised economy in which people were eating whale meat and in which bread had been rationed for the first time three years after the end of World War ii and left a situation where ‘most of our people have never had it so good’.
It is clear from the memoirs of R. A. butler, who was Chancellor of the exchequer throughout much of this period (he subsequently became Lord butler), that he understood the importance of low taxes and deregulation as a means of triggering a virtuous circle of enhanced growth. Butler was aware also of the damage done by unpredictable taxes on capital. Indeed, there seem to have been remarkably few of the ideas of the 1980s US supply-side school that had not been anticipated by butler in the 1950s, probably because both had their intellectual roots in pre-Keynesian microeconomic analysis. The remarkable thing, however, was how much was achieved with so little political fuss compared with the intense opposition that faced Lady that cher’s reforms.
There are lessons here for the present government. From the government’s rhetoric, the first lesson seems to have been grasped – even if little action has been taken. That is that supply-side reform is vital to the general health of the economy, especially during a fiscal retrenchment. The second lesson – to which only lip-service has been paid at best – is that the supply-side aspects of public finance are crucial. This includes considering the supply-side aspects of public spending and taxation in general and also the specific supply-side effects of particular taxes and welfare policies.
The second chapter - «The welfare state». The National Health Service (NHS) takes up almost a sixth of the UK government’s budget (HM treasury, 2010a), costing £104 billion in 2010/11 (HM treasury, 2010b). The public sector is responsible for 83 per cent of all health spending in Britain (OECD, 2010: Chart 3). during the years 2000–08, government spending on health increased by more than double the rate of GDP growth (ibid.: Chart 1). Indeed, despite the budget cuts affecting almost every other government department, health spending is projected to rise to £114 billion in 2014/15, a real-terms increase of 0.4 per cent (HM treasury, 2010b).
The long-term sustainability of a universal healthcare system is likely to be one of the great political problems of the next 40 years. As the ‘baby boomers’ retire and start to incur higher health costs, the fiscal position of the NHS is only likely to worsen. Little can be done about this, but policymakers can ensure that the health system is put on a sound footing for the long-term future. The aim should not simply be to reduce government spending but to develop health policy in such a way that personal choice; efficiency and dynamism are at the heart of health provision. The current system has not achieved the ideal of equality and has rarely been copied by other countries. Certainly the NHS does not achieve the same quality of outcomes as healthcare providers in other developed countries.
Even so, compulsory insurance-based models also have their short- comings. Many of them do not deal well with the problems of demo- graphic decline. We have therefore proposed a radical reform that will be more effective than insurance models and more financially sustain- able in the long run.
One option is to keep the current single-payer model and to make efficiency and productivity gains, leading to a leaner and more effective NHS. This is likely to lead, however, to major political conflict, and will not solve the underlying long-term problems of state-financed and state- provided healthcare. Approximately £34.7 billion could be saved by this mechanism, though how long those savings would prevail before inefficiencies developed again is a matter for conjecture. Assuming the same proportion of the health budget, this would translate to savings of £37.6 billion in 2015.
The alternative option is to develop a radically new health policy based on Health Savings Accounts. This would lead to better health outcomes and restore consumer sovereignty; innovation and competition – which were, before the creation of the NHS, widely admired aspects of UK health provision (see Bartholomew, 2004). The accounts could also be used to better integrate the provision of long-term care, social care and healthcare, and would provide better incentives for preventative care. Insurance against particular health risks would be compulsory and further voluntary insurance would, of course, be allowed. There would also be a safety net for specific groups.
This model could be expected to save between 35 and 50 per cent of the health budget. In 2014/15, this would translate into savings of a minimum of £44 billion, even if the state continued to finance care for the current generation of old people, children and those on low incomes. This estimate makes no allowance for improvements in preventative care or for efficiency savings and makes conservative assumptions about the groups for which the state would continue to finance – though not provide – healthcare. in many respects, this proposal achieves what many reformers set out to achieve when the NHS was set up: we would have healthcare finance for all without undermining what was best about the pre-war systems of health provision. Such a system would be particularly appropriate as we face the challenges of an ageing population.
Also there was some discussion about an environment where public spending cuts are being widely discussed is not an occasion for gloom, but an opportunity to rethink structures and assumptions which have gone unchallenged for decades. This chapter has suggested ways in which state involvement in education and related areas might usefully be rethought, but it has merely scratched the surface.
Even so, there are significant savings which the government could make without major hardship to the public – in many cases because they relate to only recently established, or planned future, activities. To summarise: in schools, scrapping the pupil premium would save £625 million this year, rising to £2.5 billion a year in 2014/15, while abandoning the raising of the age of compulsory education/training could save around £1 billion a year in 2014/15; a charge for education could save £8.5 billion while potentially increasing the quality of education significantly; in childcare and pre-schooling, ending most of Sure Start and scrapping childcare vouchers could save £1.2 billion a year from now on; in training extra savings of £250 million a year could be made by 2014/15 by cutting back on planned increases in funding for apprentice- ships; while in higher education STEM funding could be cut back by £1 billion and QR funding for research by £1 billion. this would reduce the education budget by around £15.5 billion.
In the longer term, the suggestions here indicate a wider role for the private sector, which, while we expect it to provide our food, clothing, most of our housing, heating, energy, travel, communication and most of the ways in which we enjoy ourselves, we remain curiously reluctant to trust in the classroom, the seminar or the nursery.
Recent UK governments have managed to create one of the most incoherent systems of old-age support imaginable. There are two special tax allowances for the old – both of which are withdrawn once income reaches a certain level. Older people are also entitled to a range of different means-tested and non-means-tested benefits, as well as to benefits in kind. Few of these benefits have any coherent economic justification. in addition, the government has created an extraordinarily complex state pension system which few people understand. Over several years, the government has also been undermining private provision and making it more difficult for individuals to contract out of the state pension system.
We propose that many of the benefits currently given to old people are abolished, that older people do not get special treatment in the tax system, and that we have a long-term sustainable settlement for the state pension system which allows people to make alternative private provision if they wish to do so. Other short-term adjustments are proposed to the state pension system such as raising the state pension age. The total savings from these proposals are approximately £15.5 billion. In addition, tax revenues of an additional £3.0 billion would arise from removing special allowances for older people. Furthermore, underlying public spending would be cut by another £17 billion, though this would not affect headline public spending because of the way in which public sector pension costs are currently incorporated in government accounts. More important than the short-term savings would be significant benefits from a more coherent tax and benefits system and from long- term reforms to the state pension system.
It should be noted that there are other proposals in other chapters that also affect government spending on older people. The proposals for health savings accounts will ensure that healthcare for the elderly can be pre-funded and will also lead to the pre-funding of much long-term care. Also, the system of means-tested benefits for the elderly is dealt with in another chapter. The cuts suggested here, though radical in terms of the current political debate, generally only remove benefits that have been granted in the last fifteen years. The proposed reform of the state pension system would, however, have radical implications for spending in the long term.
The third chapter named «The warfare state». For reasons which are not entirely clear, politicians and analysts on the free market end of the spectrum, even while insisting that governments do less, are usually reluctant to accept cuts in defence spending.1 yet in the sphere of defence, doing less and spending less can often produce better results than doing more and spending more. Students of inter- national relations learn about the security dilemma in almost their first class: a state’s efforts to improve its own security may be misinterpreted by others as aggressive, causing them to spend more on their defences, thus making the first state actually less secure than it was to begin with (see, for instance, Glaser, 1990). Similarly, in the last few years we have seen how attempts to increase Britain’s security by waging war overseas in Iraq and Afghanistan have probably made it less secure, radicalising certain elements of the British population and so increasing the likelihood of terrorist attack. The counterproductive nature of our policies does not excuse such terrorism, but it should make us consider alternative policies which will have a more desirable effect.
The recent Strategic defence and Security Review (SDSR) brought predictable howls of protest from those who felt that the proposed cuts would endanger Britain’s security. In fact, the SDSR represented a lost opportunity to reduce expenditure much more dramatically. A rational analysis of Britain’s defence needs reveals that much of the country’s current military capability is not only unnecessary but also dangerous.
The best way to serve the national interest would be to cut this capability. As this chapter shows, cuts of as much as 50 per cent of the current budget are not only possible, but desirable, and should be a priority of any British government in the future.
The forth chapter named « The transfer state». The substantial increase in ODA spending in the past decade – both by Britain and by some other countries – can be seen as a response to campaigns run by anti-poverty groups, public intellectuals and, of course, those noted development experts, rock stars. These campaigns claim that such spending is necessary to reduce poverty and improve livelihoods in other countries. the foregoing analysis shows that not only is this not true but that increased government spending on development aid is likely to be counterproductive.
The UK welfare system often combines the worst features of the various systems that exist elsewhere in the developed world. Short-term income replacement devices are not particularly generous, but high replacement ratios arise nevertheless. Withdrawal rates are generally high, and yet benefits are poorly targeted. Most redistribution is intrapersonal, crowding out private savings and insurance; at the same time, in most transfer programs, the link between contribution and entitlement is rather weak. As a whole, the system discourages work, family formation and saving. Even a decade of robust labour market performance and extensive work promotion programs has done little to curb concentrated, entrenched dependency.
The fact that the transfer state could grow so large despite performing so poorly suggests that fiscal illusions are at work, creating permanent electoral pressure for further rounds of expansion. Any lasting reform would have to address these underlying dynamics. An important element of ending fiscal illusions is the strict separation of tax liability and transfer entitlement, which, in turn, requires a drastic simplification and standardisation of the benefit system (and ideally the tax system as well). As a highly desirable side effect, this would immediately cut the highest EMTRs, creating beneficial dynamics.
This chapter should reduce transfer spending by around £31 billion in 2014/15 prices. The total fiscal savings from the proposals in this chapter are listed in table 20. Part of the savings would be recycled into higher household tax allowances.
The reforms proposed here would be more effective, and easier to implement when coupled with reforms in other areas. These are beyond the scope of this paper, but suffice it to name two areas. The beneficial effects of improved work incentives will, of course, best unfold in a flourishing labour market. Indeed, introducing the work requirement system proposed above will lead to fiscal savings only if it succeeds in moving many recipients into the regular labour market eventually. Welfare reform would increase labour supply; we also need liberalisation of labour market regulation, where the UK lags behind not just the USA but countries such as Australia, Switzerland and denmark. Another important companion reform would be a wholesale liberalisation of the land use planning system, enabling a drastic increase in the supply of housing, and a plummeting of its cost. The remit of the welfare state could be substantially reduced if basic requirements like housing were easily affordable across the income distribution. Planning liberalization should also help labour mobility. One might expect the development of a more vibrant market in unemployment insurance for those who did not wish to submit to work requirements if they became unemployed. Similarly, though the topic is not covered in this chapter, there would seem to be a strong case for replacing incapacity benefits with disability insurance. The work requirement might not apply in the same way to those who are disabled but income additional to the Negative income tax payment would require private insurance.
The logic of the proposals in this chapter is simple. Topping up the incomes of low-earning full-time workers requires much less input from the state than substituting the pay of several workdays. If people wish to receive income supplements then they should be prepared to work a full week. if they cannot find work, we should ensure that the pattern of their week is not dramatically different from that of people who do work full-time. Full-time work requirements are by no means ‘tough on the poor’. They are the very prerequisite for low EMTRs, which, in turn, are the key to breaking up the poverty trap. Benefits for those on workfare programs could be similar to the level of benefits being received by those who do not work under current arrangements. This level of benefits would be withdrawn relatively slowly as household income increased. There would be a much higher household tax allowance – partly financed by the welfare savings – but nobody would both pay tax and receive benefits. Those a little below the tax allowance would pay no tax and receive a small amount in benefits. Middle-class families would receive no benefits but would have a very high tax allowance.
The fifth chapter -«The infrastructure state». This chapter has not examined every element of state transport expenditure. Nevertheless, it has demonstrated that substantial economies can be achieved by focusing on the railways, buses and roads. Cuts can also be combined with reforms to achieve significant efficiency gains, in particular by a program of incremental road pricing through privatisation. In the medium term, the elimination of operating subsidies and capital spending on uneconomic projects could reduce rail expenditure by up to £7 billion per year. Phasing out bus subsidies and deregulating local transport markets to help the less well off could save perhaps £4 billion a year, while applying similar policies to London Under- ground might cut another £1 billion or so.15 introducing VAT on public transport fares would perhaps raise £2 billion per year. On the roads, the suggested incremental privatisation of motorways and trunk roads could remove £1 billion of Highways Agency spending, as well as gradually reducing its £1.4-billion-a-year maintenance budget. The savings from part-privatising local roads could be substantial but are extremely difficult to estimate, though the estimated £1 billion from ending funding for councils’ anti-car measures can reasonably be factored in. in addition, the extension of market-based pricing in the transport sector would produce dynamic benefits with a positive impact on general tax revenues. However, the difficulties of quantification mean that an estimate is not provided here. These measures may well lead to higher transport costs for public transport users in the south-east. This is as it should be. Artificially reduced transport costs distort decisions about where to locate businesses and personal decisions about where to live and encourage congestion in those parts of the country with the highest rents and living costs. They may also raise house prices.
In conclusion, the transport budget could plausibly be cut by about £15 billion per annum by 2014/15. A continuing program of road privatisation would then lead directly to government capital receipts and hence lower debt interest costs together with reductions in vehicle excise duty and fuel duty. if this process were to commence in 2014/15 (assuming it is not feasible to proceed earlier), it is plausible that the government could raise approximately £10–20 billion in the first year based on recent estimates of the value of the strategic network.16 Remaining state transport spending would be phased out in the longer term as government roads were gradually denationalised.
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