Ruth Porter: Britain’s route to economic recovery isn’t rocket science: just spend less and cut taxes

THE Government will add around £350bn to the national debt before the next election. A ComRes poll commissioned by the Institute of Economic Affairs found only nine per cent of the public knew this important fact.

Astoundingly, 70 per cent of the public thought the Government would be reducing the national debt by this amount.

These figures are mind-boggling – £350bn is a huge number, but this is the context of what the Government is up against.

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The state’s finances have been left in such a mess that urgent action is needed. Not only that but, despite maxing out the nation’s credit card, the quality of services like health and education is not measurably better for it.

The Institute of Economic Affairs has just released a major new piece of research Sharper Axes, Lower Taxes which sets out a plan to get public spending down to 30 per cent of GDP by the next election (instead of the Government’s plan of getting it to around 40 per cent).

In order to do this, the Institute proposes some fresh thinking about how services are delivered and areas like welfare and transport structured. This plan would help deliver extra growth for the economy (of around 0.7 per cent a year).

It would provide better services in many areas. But most importantly it would give spending power back to people, taking it from the Government. The £215bn additional savings in government spending that the research proposes is the equivalent of average tax cuts of £7,500 per household.

Polling on the proposal to reduce government spending further found that the public were largely supportive of the plan, with 70 per cent of people opting for it instead of the Government’s higher spending plans, when given a straight choice.

This is worlds away from the media portrayal of the public reaction to reductions in Government spending.

Images of strikes and talk of tough times plastered across our screens make one think that the coalition is moving against the tide of public opinion.

Actually, public opinion is urging them to do more and rightly so. It is the unions that are out of step with public opinion. The more government spending can be brought under control the less tough the state of people’s personal finances.

The way many services are currently set up focuses them around government rather than the people who use them. This report looks at how by changing this major savings could be made.

Some of the biggest spending cuts include £44bn from health reforms; £46.5bn from reforms to the welfare state and pensions; £17bn from defence; and £12bn from foreign aid. Another £40bn per annum will also be raised from asset sales.

By reducing the size of the state, the amount of tax the Government charges could also be radically reduced.

If we reduced spending to around 30 per cent of GDP, the Government could probably raise the money it needed from a flat income tax of around 15 per cent, VAT of around 10 per cent and various other taxes which could also be reduced from current rates. Imagine what substantial tax cuts could do to the choices of ordinary families around the country.

Given the Press coverage of the Government’s spending reductions, it is hardly surprising that the public think it is making massive in-roads into reducing the debt – but actually the reductions being made are modest, and still leave the Government spending around 40 per cent of the national income. The media must take responsibility for not doing a better job of educating people about these basic economic facts.

The economist Ruth Lea points out that “the rapid growth of the state in the first decade of the 21st century, the public sector’s atrocious productivity record and the catastrophic fiscal deficit are surely the most disastrous aspects of Labour’s economic legacy to the coalition Government”.

She goes on: “George Osborne, the Chancellor, has commendably and in the teeth of hysterical opposition taken some steps to curbing public spending and rectifying the public finances. But, if Britain’s lost competitiveness really is to be restored and the brake on growth released, he needs to be far more radical.” The public agrees.

The majority of the people who expressed an opinion in the poll, 55 per cent, believe that public spending should be 35 per cent or lower. This should give the Government encouragement to continue to pursue its plan. Importantly, it should also give them pause to stop and consider holding another review making further reductions in Government spending with a plan to reduce taxes substantially. Growth has been slow and faltering, but such a plan could help drive recovery.

The British economy is tough, resilient and determined, but it needs certain conditions to thrive. This new research sets out a guide for what those conditions are – less government spending and regulation, and lower taxes. It’s more important than rocket science and not as complicated.

Ruth Porter is communications director of the Institute of Economic Affairs