Headlines: July 2nd, 2004

A report today claims that if productivity in the public sector had risen at the same rate as it has in private business since 1998, government spending would need to be only 35 per cent of Britain’s Gross Domestic Product.”Tax ‘n’ Spend: No way to run an economy” has been written by Ruth Lea, Director of the Centre for Policy Studies. Her study says that if UK government spending was as efficient as that in Japan, the United States or Luxembourg, public spending could be reduced to just 84 per cent of its current levels.

The report says it is time that falling public sector productivity was addressed. It shows that public spending is set to rise from 320 billion pounds in 1997 to 580 billion in 2007. That represents a rise in public spending as a proportion of GDP from 39 to 42 per cent. That, says Ruth Lea, is equivalent to ten thousand pounds for every household in the country.

Ruth Lea says the increase in spending has been accompanied by increases in taxes and borrowing with the current Chancellor’s policy, however well intentioned, being one of high public spending and high taxation. As a result, the report finds, the British economy is converging with that of the Eurozone and becoming less like the economy of the US, which, the report says, is more successful.

The report summarises economic research showing that high rates of public spending results in long-term damage to economic growth and that too low a rate can also be damaging. Increases in spending and taxation ‘crowd out’ private spending and destroy initiative.

Ruth Lea says Sir Peter Gershon’s review of government efficiency is to be welcomed, but the 20 billion pounds of waste identified by the review will be equivalent to only 3.5 per cent of public spending for 2007. She points out, too, that the Chancellor is unlikely to return these savings to the taxpayer but will reallocate them in the forthcoming Comprehensive Spending Review.