On Saturday I attended the third Norman Barry Seminar for the Study of Liberty at the IEA office in London (am still not quite sure how I got an invite, but anyway). The subject was How to Shrink Government and  Debt and based mainly on their publication ‘Sharper Axes, Lower Taxes’. There was quite a few interesting points made, of where this is but a brief summary.

The first session looked at why the size of government matters, and how we got to the current situation. We looked at how it is possible to have a state that has a large scope of activities but doesn’t spend a lot (eg Singapore), and conversely historic cases where state spending has been high but activity limited to few areas (eg in wartime). Research by Peter Lindert was mentioned, which suggests it is possible to have high government spending IF it is universal (not redistributive) AND the economy is very free and not interfered with – as is the case is a lot of Scandinavia (As an aside I can’t help but wonder how much better off the UK would have been with a Scandinavian – style left, yes we’d probably ave the current big spending government, but would have avoided the trashing of most of the UK’s heavy industry)

Moving on we looked at some charts of government total spending and revenue, and a fact I found most interesting historically the HM government has never succeeded in taxing more than 38% of GDP, after that activity is reduced or capital flight occurs. This suggests to me that 38% is the peak of the Laffer curve (for the UK), and is also coincidentally roughly where we where back in 1997. This explains a lot of the current problem – the UK has been running a structural deficit of 7% of GDP since 2007, and since the crash this has gone up to 12%.

Moving onto looking at the debt and deficit (and the difference between them!) While the debt has indeed been a lot higher in the past, we are adding to it every year and there are future costs (pensions, nursing care, etc) that will also add to the pile. When the debt was built up in past wars as soon as the shooting finished governments slashed spending, balanced the budget and paid it back. Gladstone ran on a slogan of ‘peace, retrenchment (debt repayment) and reform in the 19th century, abolishing 60 taxes in one budget alone. This was also while the scope of the state was expanding.

Today due to the scope of government activity this is impossible – especially when Health, Education and Welfare are such huge chunks of  spending (debt interest and repayments can’t be cut for obvious reasons, which scarilly will soon be the fourth largest outlay) Also most government debt today is index-linked so can’t be inflated away (as happened to half of 20th century debts). So why does the government seem to be encouraging inflation we were asked? Partly to help reduce private debt, which the UK leads the world in – mostly mortgages and unsecured loans.

The conclusion we came to is that unless or one more of these 3 areas is taken outside the scope of government it will not be possible to rebalance the national finances and pay down the debt. Next we looked at what the Coalition government is actually doing – 0.4% spending cuts (taking us back to 2007 levels of spending), which as debt interest is increasing, health and foreign aid are not being cut has led to much bigger cuts in other areas (though as previously mentioned all other areas are insignificant compared to Health, Education and Welfare spending. Clearly the government really needs to be radical and decide to do less, ideally they should have picked n one of the big 3 for radical reform and rolling back the state’s role in it, rather than the tinkering they are currently doing.

After lunch we looked at what could be done, looking first at defence and whether it is worth replacing Trident (which is probably not worth it, though I would disagree with giving up nukes entirely. Air launched systems would be a better option IMO), then moving onto the big 3 areas.

For welfare we discussed 3 options

1) A citizens income/negative income tax

2) A contributory system, on the lines of Singapore’s individual accounts (as opposed to the current non contributory system – it was suggested this would be easiest to ‘sell’ as polls suggest there is a lot of public support for this)

3) Mutualisation- restoring friendly societies (the ‘Libertarian utopian’ solution)- this would need a real paradigm shift to occur.

For Health we asked whether reform is possible probably not for a good 20 years after the current botched plans. The NHS could be made a bit more efficient and if the economy starts growing again the time for radical reform could be delayed. However eventually the state’s role in healthcare will need looking at seriously.

Finally in education vouchers, for profit free schools and abolishing LEA’s were discussed, this area does seem the most likely to succeed in having a reduction the state’s role thanks the reforms already made.

The main conclusions drawn from the day were that in the next 10 years or so we will need to have a serious discussion on what the role of the state is going to be, and we need to have ideas and policy proposals ready for when the politicians finally accept the need for reform.