Magazine article Public Finance

The Axe Man Has Been

Magazine article Public Finance

The Axe Man Has Been

Article excerpt

THE LONG-AWAITED SPENDING Review IS IiOW complete. While the huge repair job on the public finances is unavoidable, the balance between taxation and spending cuts is a matter of political choice, and the coalition plans to make spending reductions do the heavy lifting.

Is this approach wise? Well, economics is reasonably unhelpful in the debate about how to proceed. There is theoretical and some empirical support for both the government's approach and the emerging opposition line that taxation should take more of the deficit reduction strain.

Whatever view one takes on the desirability of £83bn in spending cuts, setting out such a plan and actually achieving that aim are two very different things. The coalition, not unreasonably, wants to get the pain out of the way well before the next election. This will avoid the country's fiscal credibility being jeopardised by a general election, with all the unfunded spending pledges that entails.

But there are at least three reasons why implementing this level of cuts might not be feasible by the end of the Parliament.

The first thing that might blunt the Osborne axe is that the public desire for good services might prove too strong. It is clear that the increased spending on public services over the past decade was unsustainable at the prevailing levels of taxation. And polls suggest that a majority of the public favour cutting spending over tax increases to breach the yawning gulf. But that viewpoint in the abstract might change when the reality of cuts emerges.

As people's incomes rise, they tend to want to spend a higher proportion on things like health and education. It's therefore reasonable to predict that the voting public will ultimately prefer to have a higher proportion of their income or wealth going in tax to fund such services, relative to a decade ago. This is added to the reality of an ageing baby-boomer population placing greater strain on service provision, and that long-term trends seem set against an overwhelmingly cuts-based solution to the deficit.

The second effect that could blunt the axe relates to cost control. From Whitehall, it might seem as though all that needs to happen is for ministers to pull the spending levers and costs will be cut. Unfortunately, in many policy areas, it doesn't work that smoothly. …

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