Academic journal article National Institute Economic Review

Are Government Spending and Taxes Too High (or Too Low)?

Academic journal article National Institute Economic Review

Are Government Spending and Taxes Too High (or Too Low)?

Article excerpt

The Review is pleased to give hospitality to CLARE group articles, but is not necessarily in agreement with the views expressed; responsibility for these rests with the authors. Members of the CLARE Group are M.J. Artis, A.J.C. Britton, W.A. Brown, W.J. Carlin, J.S. Flemming, C.A.E. Goodhart, J.A. Kay, R.C.O. Matthews, D.K. Miles, M.H. Miller, P.M. Oppenheimer, M.V. Posner, W.B. Reddaway, J.R. Sargent, M.FG. Scott, Z.A. Silberston, J.H.B. Tew, S. Wadhwani and M. Weale.

Targets and Accounting Concepts.

The UK Conservative government in the 1990s declared a central medium-term objective of its economic policy to be a reduction in the ratio of public (government sector) expenditure to GDP to below 40 per cent. Projections accompanying the 1996-97 Budget envisaged this target being achieved in 1997-98.

The target was expressed in terms of GGE(X), an aggregate which combines central and local government spending, but excludes items financed out of the proceeds of the National Lottery through the charity and heritage boards, and calculates government outlays for payment of national debt interest on a net basis, i.e. subtracting the government's receipts of interest and dividends. Whatever the justification for these adjustments in terms of accounting principles, they have the effect of making the proclaimed constraint on public expenditure (slightly) less severe than it otherwise would be.

On the other hand, GGE(X) also excludes receipts from the privatisation i.e. sales of (formerly) public enterprises. In other words, it does not treat them as a negative public expenditure item. Some presentations of the public-sector accounts still do show privatisation receipts in this way, by analogy with the netting out of sales of fixed assets (council homes, surplus land etc) in the accounting of public-sector capital spending. In the latter case, however, what is being calculated is the total of public-sector fixed-capital formation requiring to be financed. Enterprise privatisation sales are more usually and correctly classed as financial transactions which reduce public-sector assets, just as borrowing increases public-sector liabilities. See Tables 1a and b for the historical record of GGE(X) and other components of the Public Sector Borrowing Requirement (PSBR).

In terms of short-term policy decision making, the government focuses on a somewhat narrower expenditure aggregate, the so-called Control Total. This is arrived at by subtracting from GGE(X) those expenditure items which are most affected by cyclical factors and are therefore not subject to government expenditure policy in the short term (see Table 2). They comprise debt interest and cyclical social security (i.e. Unemployment Benefit and Jobseekers' Allowance plus income support paid to people of working age). There are also various accounting adjustments to adapt the accruals-based (national-income-accounting) concept of GGE(X) to the cash-based concept of the Control Total. All this means that the latter is some 15 per cent smaller than the former.(1)

Philosophy

The government's policy towards public expenditure reflects its wish to limit the economic role of the state and enhance that of markets and individuals. This broad objective impinges on public expenditure from different angles. First and foremost, public spending has to be financed by either taxation or borrowing. The government attaches high priority to limiting the weight of taxation (especially direct personal taxation), partly because of the distorting effects it is alleged to have on work incentives, and partly because it interferes with individual freedom of choice. The government attaches correspondingly less importance to the redistributive role of taxation and public expenditure in favour of the poor. [TABULAR DATA FOR TABLE 1A OMITTED] In addition the government aims to minimise the volume of public-sector borrowing in financial markets. The main reason is presumably that debt service will require taxes to be levied (sometime) in the future. …

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