Here's a strong argument to those that say that taxes are a drain on growth and must be cut:
there is no correlation whatsoever between public spending levels and growth per capita, as this graph below shows
The economic performance of the US over the past 10 years is pretty much identical to that of sclerotic, socialist, rigid France, and significantly worse than that of socialist, statist Sweden and Finland, measured in statistically significant terms, i.e. growth per capita
(pulled from the article linked to below)
Martin Wolf: Big spending doesn't mean less growth (FT, 23 March)
The question [is whether high shares] of public spending in GDP prove economically harmful. Some think that no economy can tolerate taxes higher than those elsewhere if it is to sustain "competitiveness". Others talk as if public spending disappears into a black hole from which nothing of value emerges. Is there anything in these crude arguments? Not much, is the answer. Citizens of the rich countries deserve a more subtle debate.
Start then with overall economic performance, particularly the growth in output per hour and GDP per head. The charts [see at the top of the post and below] show both between 1995 and 2004 against the share of general government spending in GDP in 2004. The share of government spending in GDP varies by a ratio of almost two to one, from Sweden on 58 per cent to Ireland on 34 per cent. There is a group of relatively low spenders: the English-speaking countries (except the UK), Switzerland, Japan and Spain. There is a group of extremely high spenders: Sweden, Denmark and France.
What, then, do the charts show about the link between government spending and economic performance? There is none, is the answer.
Ireland's performance generates a small, but statistically insignificant, slope downwards to the right. But Ireland is an exceptional case. What is striking is the slow growth of GDP per head in low-spending Japan and Switzerland and the high growth in high-spending Finland and Sweden. The relatively poor performance of the US may surprise some readers. But remember that US GDP grows faster than those of European countries because its population of working age increased by 1.2 per cent a year, against 0.4 per cent in the European Union between 1994 and 2004.
I would not wish to push such crude data too far. Measurement of GDP and so of productivity is increasingly hard to do as output becomes less material. It is particularly hard to measure the output of government services. Yet one overriding point does emerge: the mere fact of a rising ratio of public spending in GDP does not spell doom for the UK (or any other) economy. This is consistent, surprisingly enough, with an analysis from impeccably conservative US sources: the Heritage Foundation and The Wall Street Journal. In the 2005 Index of Economic Freedom, which measures, however roughly, the underpinnings of market economies, Luxembourg (ranked 3rd) and Denmark (8th) are above the US (10th), as is the UK (7th). Sweden (14th), Finland (15th), the Netherlands (17th), Germany (18th) and Austria (19th) all fall in the global top 20.
What then of the idea that higher spending (and so taxes) must also spell a lack of global competitiveness? The short answer is that it is nonsense, for reasons elaborated in my book, Why Globalization Works (Yale University Press, 2004). The burden of higher taxation will be shifted on to owners of relatively immobile factors of production. Moreover, no link exists between the size of government spending and a lack of something one could reasonably define as "international competitiveness".
What does indeed matter is the efficiency with which money is both raised and spent. But tax levels are only one of many determinants of economic performance. Far more important are: the quality of institutions, particularly of public administration and the judiciary; the security of property; the probity and public spiritedness of politicians; the soundness of money; the quality of education, health and infrastructure; and the extent of arbitrary regulation of economic activities. Monomania is usually a mistake. An exclusive focus on the tax burden is an example.
What we must abandon is a debate that takes the form of "public sector bad, private sector good", or the other way round. It is particularly stupid when, as in the UK, the decision has already been made to pay for evidently high social priorities through the state. Health and education do not suddenly become far less important than holidays in Ibiza merely because they are financed through taxation.
In making the decision on what to put into the public sector and how much to spend on it, we have to place substantial weight on underlying social and political values. But we must also ask, first, what we must do through the government (defence and law and order, for example); second, what we want,for reasons of social solidarity, to do through government (provision of basic incomes for all, of universal education and of basic health services, for instance); third, whether we wish to pay for services through general taxation or user fees; fourth, what is the least costly way of raising revenue; and, finally, whether we want services to be paid for and provided by government or merely paid for by government and provided by competitive private suppliers.
These are the right questions. Labour's higher spending will not destroy the British economy, just as Finland's high spending has not destroyed Finland. What matters here, as elsewhere, is not what you do but the way that you do it.
martin.wolf@ft.com
Sources for charts: OECD; The Conference Board
Martin Wolf is one of the most respected (and reality-based, to use a term you may be familiar with...) economics columnists around, which is why I copied most of his column here.
Let me repeat again:
The economic performance of the US over the past 10 years is pretty much identical to that of sclerotic, socialist, rigid France, and significantly worse than that of socialist, statist Sweden and Finland, measured in statistically significant terms, i.e. growth per capita
Do not believe everything you read in the press about continental Europe. There are a number of problems, but we are not in terminal decline. Our economic model has its flaws, but being unsustainable or significantly weaker than the Anglo-Saxon one is not one of them.
Taxes are not bad - it's a HARD FACT
They are used to provide necessary services or socially useful goods which have positive macroeconomic effects.
They are not just a drain on productive workers.