Economic Policy
Robert Skidelsky
Hansard | Monday, June 25, 2001

My Lords,
This has been an interesting debate, and I am very pleased to be taking part in it. Lady Hollis has been her usual thoughtful, passionate, and charming self-a combination she has made uniquely her own; and my noble friend has done the best with the party materials available to him.
I wonder whether noble lords have fully grasped the revolutionary philosophy which had underlain this government’s economic policy. It’s easy enough to draw up its list of objectives: price stability, faster economic growth, world-class public services, the attack on poverty or social exclusion as it’s now called.
The revolution lies in the way the government, and particularly the Chancellor, sees the interconnections between these separate goals. Essentially, the government has one overriding aim: which is to make the economy grow faster. The other elements of policy –price stability, world class public services –especially education –and the attack on poverty are seen primarily as connected means to this goal.
In other words, fiscal policy is the active agent in new Labour’s supply-side agenda. We can call this ‘supply-side socialism’.
Now why do I call this a revolution? First, because it abolishes the separation between economic and social policy. Traditionally in Britain –and you can trace this back to Beveridge –social policy was designed to meet social, not economic, objectives. The aim of the Labour Party was to capture a large part of the fruits of economic growth for social goals –better educational opportunities, better health care, higher pensions, and so on. Improved social provision was to be the result of economic growth, not the means to it, and should not primarily be judged by its effect on it. The Blair government has reversed this paradigm, much to the bewilderment of old social democrats like Lord Hattersley.
Secondly, the government’s approach marks a break from the fiscal philosophy of my noble friend, Lord Lawson of Bleby. In Lord Lawson’s view the main contribution that a government could make to economic growth was to provide a stable macroeconomic background –one condition of which was to privatise the loss-making commercial public sector - and to liberate private entrepreneurship by reducing taxes, simplifying the tax system, and de-regulating both product and labour markets. The Lawson strategy implied that as the economy grew people would pay more for education, health care, and pensions out of their household budgets. This was supply-side Conservatism as practised in the 1980s and for most of the 1990s.
It now gives us a good vantage point from which to open a serious debate on what this Chancellor has tried, and is trying, to do.
 The first thing to say is that his activist fiscal strategy implies a substantial increase in taxation. I don’t see how this conclusion can be avoided. True enough, the government hopes to improve the quality and efficiency of public services through the use of private/public partnerships. Good luck to it.
But PPP is no substitute for spending money, and the government has not claimed otherwise. The total tax burden has risen from 37.6% of GDP in 1996-7 to 40.5% in 2000-1. Or to put it another way: national income in cash terms has grown by 21% since 1996 and taxes have increased by 30% in that period. So real disposable income has been growing at a slower rate than real pre-tax earnings.
But that’s not the end of it. Total Managed Expenditure –the broadest measure of public spending –is set to rise in real terms at an average annual rate of almost 4% between 2000-2003, or one and a half times the trend rate of GDP growth.
The Social Security Budget is on a roll. The Government’s Minimum Pension guarantee is a commitment with serious long-term public spending implications.
Take the pledges on the NHS. The PM said it was his ambition to raise health spending to the European average by the end of this Parliament. We spend 6.7% of GDP on health services, the European average is 8.3%. Last year £44bn. of our taxes went on health. To spend what the Europeans spend we would need an extra £28bn. a year –and that’s not counting the backlog of investment needed to bring hospitals up to the European standard. Even to spend an extra £28bn. a year means 30p in the £ on the standard rate of income tax. I wonder how many of the people who would be happy to pay higher taxes to get better public services realise how much higher they would need to go. As Anthony Hilton, City Editor of Evening Standard put it in a recent article, ‘Tony Blair could bankrupt the Exchequer and still not convince voters he has kept his word’
The effect of these big discretionary increases in public spending will be to increase the net borrowing requirement. This is expected to be in the double billions for each of the three years starting with 2002-3, causing Gross Public Debt to increase by 14%. Unless the national growth rate goes up substantially in Labour’s second term –and there has been no sign of it so far –increases in taxation are inevitable.
Next consider the impact of the Chancellor’s fiscal activism on the nature of the tax system –how he raises his money and distributes his benefits.
An ideal tax system should not distort the spending and saving decisions of households.But this Chancellor wants to do exactly that –to channel people’s money to what he wants to do rather than what they want to do. As a result we have one of the most complicated and distortionary fiscal systems in Europe. As Jonathan Seed put it in another place earlier this year: ‘Even before this Budget a bewildering array of different rates, credits, tapers, allowances, rebates, reliefs, means tests and adjustments led us to the point at which even those with a fair degree of financial knowledge have not a clue about the true extent of their tax liabilities’. (Hansard c.365, 7 March 2001)
Many economists believe that the over-complicated and distortionary system we now have has damaged medium term-growth prospects –achieved the exact opposite of what the Chancellor intends.
What I think is happening is this. Improvements in the public and social services, which should be the results of better economic performance, and should therefore not be made till economic performance has in fact improved, are now justified as an ‘investment’ in economic growth. Once you treat the Welfare State as an engine of economic growth, you have removed a decisive constraint on public spending. This puts the ‘the Chancellor’s own fiscal rules in jeopardy. It is also a very neat way of pre-empting the debate on how the public and social services should in fact be financed, as who can be against wise and prudent investment? The Conservatives fell into this trap in the last election. They were forced to compete on the rhetorical terrain captured by this most politically astute of Chancellors.
Politically it is brilliant, but does it make economic sense –or even political sense in the longer run?
This is where we have to join the battle. The Chancellor believes that faster economic growth can be secured by heavy public investments in various kinds of human capital and by using the tax system to alter behaviour. People’s decisions on how to spend their earnings are replaced by government decisions on what is good for them. The result will be higher taxes and increasing distortion, regulation, and bureaucracy.
We believe in a simple tax system, with tax rates set at a decreasing share of national income, and, to coin a phrase, in a ‘bonfire of controls’.We believe that that is the only way to raise the long-run trend rate of economic growth. We also believe that it is right that those who can afford it should make direct contributions to the costs of education and health-care. That is the only way to raise revenue for and increase efficiency in these services consistent with fiscal balance and consumer choice.
Now we have to make a detailed and persuasive case for our alternative approach, which is something we lamentably failed to do in the four years of opposition.