Just how big is the size of the state in the UK?
A simple question you might think. Surely all you need is a numerator (a tax or public spending measure) and a denominator (a GDP measure)? Divide one by the other and hey presto there’s your size measure – as a proportion of GDP. Based on that approach, public spending is projected by the OBR to fall to 38 per cent of GDP by 2020.
Unfortunately it’s not that simple. If you use a factor cost measure of GDP, as opposed to a market prices measure, the share rises by around 5 percentage points of GDP to 43 per cent. This reveals how technical details can mask powerful truths.
And it doesn’t end there either. The total intervention of the state isn’t measured by tax and spend alone. There is also regulation to consider. If the government pays income related benefits on day one, but then mandates a national minimum wage on day two, public spending could fall but the total intervention of the state would be unchanged.
Of course, the impact of regulation extends far beyond the replacement of benefits. The costs of regulation encompass a whole swathe of labour and product market activity.
Assessing the costs and benefits of such activity is fiendishly complicated with regard to individual regulations. Aggregating such impacts across the whole economy is downright impossible. But that doesn’t mean we should ignore it. Some of the best aggregate work has been undertaken in the US, with an estimated cost around 10 per cent of GDP – rather dated now. The working assumption since has been that EU membership means the UK figure will be significantly higher. But how much higher, nobody knows.
So we have a total intervention measure, so far, of at least 53 per cent of GDP (38 per cent plus 5 per cent plus 10 per cent). Unfortunately this is not the end of the story. There’s more.
Political correctness is a tumour at the heart of our culture. Recent decades have seen an explosion in political correctness, as regulation of our behaviour (product and labour market regulation) was added to by the regulation of our minds (what we think and say). And while it is utterly impossible to quantify the impact of such encroachment by the state, it doesn’t make the tentacles of control any less real.
Political correctness also interacts with other areas of state intervention, making it difficult to curtail spending, cut taxes or undertake a bonfire of regulations. But if the UK is to achieve its economic potential in the twenty-first century, it will need to take a scythe to tax and spend and regulation, and apply a wrecking ball to political correctness.
Political correctness is embedded in our culture, and culture shapes institutions (the rules of the game, such as law, taxation and regulation), which then shape economic performance (such as productivity and competitiveness). An analogy might be a “River of Prosperity”, with culture upstream, institutions mid-stream and economic performance downstream. Political correctness risks blocking the river, far upstream.
Research on the impact of freedom – such as by the Heritage Foundation and the Fraser Institute – on economic success is powerful and compelling, and the conclusion is clear. If we just look at tax and spend measures alone, we will delude ourselves as to the true scale of economic and political freedom in the UK.