I used to say that the battle for a smaller state had to be fought and won in every generation. That now appears to be wrong. The battle needs to be fought and won in every General Election.
The Prime Minister has announced a host of labour market regulatory changes if she regains power. She and the chancellor clearly want to keep their options open for possible tax rises as well.
Labour has gone big time on traditional tax and spend, with almost £50bn in tax hikes, a £250bn infrastructure programme (who pays is unclear) and a massive renationalisation programme covering water, rail, energy and the Royal Mail. Unsurprisingly, there’s no mention of where the money comes from for this either. Labour’s £50bn hike would take tax to its highest share of GDP since 1949.
But its not just the big two parties. No political party in Britain is genuinely committed to reducing the size of the state; quite the opposite. Of course, there are many Conservative MPs who advocate more market and less state, but they haven’t been allowed anywhere near the manifesto.
It’s time for a healthy dose of reality with regard to statism. Over the past 20 years, the economic literature on the relationship between government size and growth has become more sophisticated.
Generally speaking, the more sophisticated the methodology, the more robust the finding of a negative relationship between government size and growth. There is an increasing consensus in the literature on the scale of the trade off between government size and growth. If the state increased by 10 percentage points of GDP, the associated reduction in GDP growth is between 0.5 and 1.0 percentage points.
There are also good reasons to believe that this behavioural elasticity will be stronger in the twenty-first than the twentieth century. These are big numbers. An economy growing at 2 per cent per annum will double in size every 36 years. One per cent growth and the doubling takes 72 years.
UK trend GDP growth is a little above 2 per cent per annum, possibly less. What is certain is that the Corbyn tax hikes would seriously damage the UK economy, given the elasticity cited above.
But if we take a wider perspective, moving from wealth to wellbeing, what is the relationship between government size and wellbeing? One recent review of the literature states that the unequivocal conclusion is that larger government doesn’t imply a happier population. The assertion that a more active government creates greater happiness, rests on very shaky foundations indeed.
This shouldn’t surprise us. The size of government probably works in two ways. First, due to the distortionary costs of taxation and/or public choice arguments around state failure. Second, due to the loss of growth and affluence stemming from the larger state.
The bottom line is that over the past two decades a considerable body of economic literature has built up showing a strong positive relationship between economic freedom and wellbeing. Greater economic freedom is associated with greater happiness.
You may thinks that the statists (in whatever guise, May or Corbyn) will make you happy, but they won’t. Greater economic freedom widens choice and improves happiness by raising the sense of individual control.
The politicians may think that you want to be sold statist policies in their manifestos, but they’ve got it all back to front. If voters want more happiness, they should vote for less government.