Headlines: November 29th, 2004

A former International Monetary Fund economist says today that the British government is wrong to hold to the idea that cutting public spending – and tax – would damage public services. Professor Vito Tanzi says the 21st Century has begun with some of the highest levels of public spending and the taxes needed to pay for them.In a pamphlet published by Politeia the professor, who was Director of the Fiscal Affairs Department at the IMF for 19 years from 1981, asks if governments will now bow to the political and economic case for cutting?

Writing in “A Lower Tax Future? The Economic Role of the State in the 21st Century”, he says that public spending and tax can and must be cut and that those cuts would not necessarily damage good public services. He says evidence from industrial countries on indicators such as life expectancy, infant mortality, educational achievements, literacy rates, growth in per capita incomes and inflation, shows that in recent decades there has been little relationship between the changes in a country’s public spending as a share of GDP and the changes in the desired direction of socio-economic indicators.

Countries that have allowed their public spending to grow do not show better quantitative results for these indicators than countries that have kept their governments smaller and leaner, he says.

Professor Tanzi suggests that the problem for governments wanting to cut public spending are not the issue of a decline in welfare standards, but political opposition from those who currently benefit from the spending programmes, including employees with higher salaries or individuals with higher pensions.

However, he says, change is inevitable and there is already broad agreement amongst economists that the state should not produce goods or services that the private sector can produce. Technological progress, he claims, has put an end to the case for public ownership and with the development of markets continuing apace, the role of the state must also change. There must be an end, he says, to state monopolies in pensions, healthcare and education.