The last-ever spring Budget provides an opportunity to consider the possibility of a more rational and radical approach to the operation of the UK’s public finances.
The current model is in trouble and will inevitably, even when it moves to its new annual autumn slot, limp from crisis to crisis.
For 40 years after World War Two, public expenditure and taxation grew. In 1939 state spending represented just over 25% of GDP, yet by the late 1970s it was approaching 50%.
As government activity grew after 1945, it was possible to accommodate a near-constant expansion of welfare and public services. Defence spending declined, allowing resources to be transferred to health, education and housing.
There was little international tax competition. UK chancellors of the exchequer could set income tax, corporation tax and other revenues with little concern for other countries’ behaviour. Corporate tax rates in Ireland or Switzerland had little effect on the UK’s competitiveness. There were controls on the movement of capital out of the country.
Everything has subsequently changed. Taxes have to be set so as to attract footloose investors, companies and talent. Britain has become, by most European standards at least, a low-tax country.
At the same time, public expenditure has reached a point where not only can it no longer continue to grow as a share of GDP, but the need to balance the budget means it will have to shrink towards 37%. The medium-term average for spending in recent years has been 42% or 43% of GDP.
France and Sweden have public sectors that represent about 50% of their economies. We have not and will not unless, of course, a British government were willing to push up taxation on average earners. In a “we are the 99% world”, the super-rich “1%” cannot pay for more than marginal growth in the size of the public sector.
Even if there is no economic downturn either as a result of Brexit or for more traditional cyclical reasons, future chancellors will never be able to offer overall public expenditure programmes which expand in real terms faster than growth in the economy. Welcome to permanent austerity.
Tony Travers, director, LSE London