Politicians are scared of the small state but a positive vision will sell it to voters
HOW DO you shrink the state when it is dominated by health, education and welfare? The answer is with a positive vision that is much more than just tax cuts. The right needs to craft a compelling world-view of what the economy and society would look like with a minimalist state.
The biggest problem is the timidity of much of the political right in the UK. Frightened of being labelled “nasty”, it flees in panic at the suggestion of truly downsizing the state. Like the ancient Israelites, they can see the Promised Land but are scared to enter in, believing there are insurmountable giants in their way. And they never will enter in until they understand that, to sell a small state to the electorate, they will have to provide a holistic view of genuine prosperity. What do I mean by this?
Genuine prosperity is a function of both economic and non-economic forces. I call these the Three Big Cs – consumption, competitiveness and character. Per capita income and consumption clearly support the material elements of prosperity and life satisfaction. Competitiveness is about ensuring continued and future material prosperity. Character is the glue that holds it all together.
Increased material prosperity has, of course, transformed the lives of billions over the past 50 years. The economist Robert Lucas famously said that “once one starts to think about economic growth, it is hard to think about anything else”. He needed to get out more, but his essential point is correct. Growth is a hugely transformative influence, raising per capita GDP and exploiting the most powerful force in the universe – compound arithmetic.
But even here the right is cautious. Ronald Reagan and Margaret Thatcher made the case for a smaller state (although they actually only stemmed the rise) without having a powerful evidence base from which to draw. Over the past 20 years, the evidence base has been transformed. There is now a robust economic literature showing that size matters and downsizing the state really could supersize the economy.
As Andreas Bergh and Magnus Henrekson at the Research Institute of Industrial Economics have found, for example, there is a negative correlation between government size and growth; where government size increases by 10 percentage points of GDP, annual growth rates decrease by 0.5 to 1.0 per cent. Let’s unpack this. An economy growing at 1 per cent annually takes 72 years to double in size, at 2 per cent it takes 36 years, and at 3 per cent just 24 years. If the UK pursued a radical supply-side philosophy, which transformed the incentives to work, save and invest, we really could raise potential output growth towards 3.5 per cent by the 2020s. That would mean the economy doubling in size every 20 years. In contrast, if we continue down the Statist Road, we’ll be looking at 60 to 70 years for the economy to double. Having recently returned from Argentina, I’m very aware that the world is replete with once prosperous economies, butchered on the altar of interventionism.
But the right rejects this Promised Land. It sees the “nasty” party giant standing in its path and is scared to even appeal to the electorate’s material self-interest. Just after the Second World War, John Maynard Keynes stated that a 25 per cent tax-to-GDP ratio “is about the limit of what is easily borne”. It wasn’t the world’s greatest economic forecast, because the ratio is stuck at 40 per cent. But it won’t change until the political right introduces the third pillar in the case for a much smaller state: character.
Prosperity is linked to rising consumption, and rising consumption is linked to continued competitiveness. But both depend on the deeper factor of character. By this, I refer to the values that dominate society – what are we becoming? This is the heart of the positive vision. Do we want a dependency culture, or a society where the work ethic dominates? Do we want a society where competition is king, or where we bequeath everything to state monopolies? Why do we trust the two most important things in our lives, our children’s future and our health, to state monopolies? Do we want a society where everyone looks to government and passes by on the other side, or do we all want to be good Samaritans? Do we want a nation where people keep more of their income and become social entrepreneurs, and fund millions of points of light and little platoons, or do we want impersonal bureaucracies?
None of this is easy and, after a century of welfare, there are no guarantees that the individual will step forward if the state steps back. There could be a vacuum.
But is a smaller state really a cruel economic policy, or is it quite the opposite: the tough love that the UK requires to genuinely prosper?
Graeme Leach is director of economic and prosperity studies at the Legatum Institute in London.