Today’s new IEA research paper, Sharper Axes, Lower Taxes, provides a blueprint for a genuinely comprehensive spending review and one which goes far beyond the rather modest plans of the coalition. Intriguingly, an accompanying opinion poll, conducted by ComRes, shows overwhelming support for substantial reductions in the size of the state and accompanying tax cuts. Indeed, a very comfortable majority of voters believe that the government’s plans for fiscal retrenchment do not go far enough.
The political and media furore surrounding the cuts being made by the coalition has gone some considerable way to disguise the rather feeble nature of their strategy. In real terms, public spending will only be cut by around 3% before the next election. So, by then, the state will be spending 97p for every £1 it was spending last year. That’s hardly a major cut. It’s barely a trim.
Media outlets that purport to inform and educate the electorate seem to have done a spectacularly poor job. The facts of the matter are pretty simple. George Osborne wants to cut the size of the state to 40% of GDP by 2015. This involves a modest reduction of a few pennies in the pound in government spending. He intends to continue to spend more money than he gets in from tax receipts and will thus add to the national debt to the tune of about £350bn.
However, a full 70% of the public believe George Osborne is intent on reducing the national debt, rather than adding to it. Only 9% are aware of the truth of the matter. The electorate also thinks – on average – that the state accounts for around 60% of GDP at present. The colossal airtime given to the coalition’s fiscal policy has signally failed to impart some of the key facts about the situation. The BBC, in particular, should hang its head in shame.
For those wanting a smaller state and lower taxes, however, the outlook is fairly promising. The IEA has identified more than £200bn of additional savings in a wide range of areas including health, education, welfare and pensions. If implemented, the IEA plan would see the size of the public sector fall to around 30% of GDP by 2015. Enormous tax cuts would also be achievable – along the lines of reducing income tax to a flat rate of 15%, halving VAT to 10% and abolishing inheritance tax and stamp duty. The tax cuts rendered possible by such a sizeable reduction in public spending amount to the equivalent of around £7,500 per household per year.
The public seem keen on reducing the size of government. Fully 55% want to see the state sector reduced to 35% or less of GDP. Only 16% want to see the government sustain its recent size of 45% or more of the overall economy. Given a straight choice between the coalition’s spending plans and the IEA’s proposals, fully 70% plump for the latter, with only 30% endorsing the more modest government strategy.
The electorate may not have grasped the basic realities of the government’s fiscal plans. But it seems clear, however loud the protests from organised special interest groups, that they want a smaller state than is on offer from the main political parties and right to keep more of their own money rather than hand it over in tax.
Mark Littlewood is the director general of the Institute of Economic Affairs