A new research report from the Institute of Economic Affairs‘ (IEA) titled ‘Sharper Axes, Lower Taxes‘ states government spending would be cut by an additional £215bn a year (to around 30% of GDP) and deliver tax cuts equivalent to around £7,500 per household
The research shows how the government could reduce public spending by an additional £215bn. This would mean the government would be spending around 30% of GDP instead of the government’s proposal of around 40%. The IEA’s proposals would deliver average tax reductions equivalent to around £7,500 per household each year.
“Reducing and controlling spending has to contribute more to deficit reduction. So far tax rises have been taking most of the strain, making growth more difficult to achieve. I welcome this source book for making more progress in getting spending to a level taxpayers can afford, and hope the government will take up at least the best ideas from the list.” – The Rt Hon John Redwood MP
The reforms proposed in ‘Sharper Axes, Lower Taxes: Big Steps to a Smaller State‘ could also increase economic growth by 0.75% a year leading to dramatic improvements in long-run living standards.
Delivering a comprehensive spending review by going through government spending area-by-area this report sets out how the government could reform spending and tax policy. It shows that the government’s aspirations – such as ensuring that all have access to decent health care, and providing a welfare system for the less well-off – could be achieved much more effectively with lower government spending.
Some of the biggest spending cuts include: £44bn from health reforms, £46.5bn from reforms to the welfare state and pensions; £17bn from defence; and £12bn from foreign aid. £40bn per annum will also be raised from asset sales. (For a full list of reductions in expenditure, please see the notes to editors).
Opinion poll research conducted for the IEA by ComRes shows overwhelming public support for a much deeper programme of spending cuts.
By the time of the next election, the government is intending to spend around 40% of national income, but 55% of the public who expressed an opinion believe that public spending should be 35% or lower and only 16% want public spending to be measurably more than the coalition is intending to spend (45% of national income or more). 29% believe the coalition has got it about right, favouring the state spending between 35% and 45% of national income.
A much more radical reduction in state spending is particularly popular amongst the young (67% of under 25s and 69% of 25-34 year olds support government spending being reduced to below 35% of national income). There is a broadly equal level of support from voters irrespective of their party political affiliation.
Given a straight choice between the coalition’s plans of government spending of 40% of national income and the IEA’s more radical plan of reducing spending to about 30% of GDP and implementing average tax cuts of £7,500 per household, the overwhelming majority (70%) favour the IEA’s proposal and only 30% favour the coalition plan.
Commenting on the report, Mark Littlewood, Director General at the Institute of Economic Affairs, said:
“The coalition government should listen more to the British people in general and less to organised special interest groups that push for more government spending. Lobbying from interest groups can push tax and government spending well beyond optimal levels.
“This poll makes clear that the public favour a dramatic reduction in the size of government and the right to keep more of their own money rather than surrender it in tax.
“The government needs to adopt a Plan A+. Embracing the sort of proposals in this report would stimulate economic growth, which has remained disappointingly sluggish in the wake of the coalition’s unambitious plans so far.”
Commenting on the report, Prof. Philip Booth, editor of the report and Editorial Director at the Institute of Economic Affairs, said:
“Even under these plans, the government would be spending nearly one third of national income. If the government were limited to such a budget it could still perform the tasks it needs to perform much more effectively. There would be access to good healthcare for all and the poor would still have their incomes topped up but the government would become the servant and not the master of the people again. We would, once again, be able to have a welfare system that did lock people in poverty.
“If the government wants to achieve genuine public service and welfare reform and ensure that health, education and other services are responsive to the people they are intended to serve it must take a long, hard look at these proposals.”
Government spending is currently around 50% of national income. At these levels it is seriously damaging economic growth. Even if the coalition achieves its objectives, there will be only modest reductions in government spending. Nominal spending will rise, real spending will be cut by less than 1% per annum and spending as a proportion of national income will fall back only to 2007 levels – around 40%.
A complete review of government functions could, using the government’s definitions of government spending and national income, lead to further cuts of £215 billion to around 30% of national income.
Under these proposals, the government would also be making fewer unfunded health and pensions promises to future generations, thus putting the public finances on a sound long-term footing.
Government spending – even in areas such as research and development, investment and education – has little or no beneficial effect on economic growth. The taxation necessary to fund government spending, however, seriously and adversely affects economic growth. A reduction in government spending of the order suggested by our authors would lead to economic growth increasing by more than 0.75% per annum: this would mean that national income would grow by an extra 20% every 25 years.
To finance government spending of around 30% of GDP, taxation could be reduced and simplified.
Although it is difficult to estimate precisely, it would seem feasible that tax could be set at:
- A single flat-rate income tax of about 15% on income above the tax threshold, which would be determined by household size.
- A single person’s allowance could be around £12,000. Larger households would have much higher tax allowances so that a four-person household on median earnings would pay little income tax.
- Corporation tax of 15%.
- National insurance rates of about 10% split between employer and employee above a lower threshold than the income tax threshold so that all workers made some contribution.
- A value added tax of about 10% across a broad base of spending.
“In this swash-buckling report, the IEA points to the bureaucratic waste holding the economy back, and the tax cuts that would fire jobs growth and promote the three vital economic virtues – enterprise, hard-work and saving.” – Dominic Raab MP
Area of expenditure & Proposed cut (£bn)
Education, training and childcare 15.5
Pensions and the elderly 15.5
Foreign aid 12
Income transfers 31
Transport (including first year of road privatisation programme) 30
Energy and climate change measures 10
Total ‘headline’ spending cuts £215.5bn
The £215bn is based on the calendar year 2015 and is in addition to the cuts the government has already announced. An additional £27bn cuts in government spending are proposed that the government does not include in its own definition of spending.
Methodology of ComRes poll – ComRes conducted an online survey of 2,050 GB adults between the 8th and 10th July. Data were weighted to be demographically representative of all GB adults. ComRes is a member of the British Polling Council and abide by its rules.
“As George Osborne struggles manfully to save Britain from the disastrous inheritance of a Labour Government which for 13 years spent like a drunken sailor on shore leave, the IEA has ridden to his aid by itemizing billions in potential savings for the ravaged, ill-used taxpayer. This is the British equivalent of the Republicans’ inspiring Ryan Plan in America; a manifesto of genuine hope in the future, rather than the tinsel variety offered by Barack Obama. Sadly, not all the IEA’s ideas are immediately deliverable because of the exigencies of coalition politics at Westminster, but by merely putting these radical, innovative, far-sighted, brave and overdue options in the frame, the IEA has refreshingly reminded us that conviction politics did not die when Margaret Thatcher was overthrown a generation ago.” – Andrew Roberts, historian
The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems. The IEA is a registered educational charity and independent of all political parties.