Sharper Axes, Lower Taxes: Big Steps to a Smaller State Sharper Axes, Lower Taxes: Big Steps to a Smaller State edited by PHILIP BOOTH with contributions from sam collins nigel hawkins patrick minford julian morris kristian niemietz paul robinson j. r. shackleton david b. smith corin taylor jiang wang richard wellings the institute of economic Affairs First published in Great britain in 2011 by the institute of economic Affairs 2 Lord North Street Westminster London sw1p 3lb in association with Profile books Ltd the mission of the institute of economic Affairs is to improve public understanding of the fundamental institutions of a free society, by analysing and expounding the role of markets in solving economic and social problems. Copyright © the institute of economic Affairs 2011 the moral right of the authors has been asserted. All rights reserved. Without limiting the rights under copyright reserved above, no part of this publication may be reproduced, stored or introduced into a retrieval system, or transmitted, in any form or by any means (electronic, mechanical, photocopying, recording or otherwise), without the prior written permission of both the copyright owner and the publisher of this book. A CiP catalogue record for this book is available from the british Library. isbn 978 0 255 36648 9 Many ieA publications are translated into languages other than english or are reprinted. Permission to translate or to reprint should be sought from the director General at the address above. typeset in Stone by MacGuru Ltd [email protected] Printed and bound in Great britain by Hobbs the Printers CONTENTS The authors 11 Foreword 16 Summary 24 Tables and figures 27 PART ONE: ECONOMIC GROWTH, GOVERNMENT SPENDING AND TAXATION 29 1 Public spending, taxation and economic growth – the evidence 31 Patrick Minford and Jiang Wang introduction 31 two simple models of growth 33 is there a negative relationship between tax and economic growth? 35 Our basic results from testing the two policy approaches 38 Conclusion 42 References 43 2 The changing economic role of government: past, present and prospective 45 David B. Smith introduction 45 expansion of government 1870 to 2000 45 Government spending in the 21st century 46 Measurement issues and where the money goes 49 Regional differences in government spending 56 5 the Office for budget Responsibility 58 An alternative independent projection for the public finances 58 Conclusions 64 References 67 3 The reckoning up 69 Philip Booth the shape of a new tax system 71 References 77 PART TWO: THE WELFARE STATE 79 4 Healthcare – trimming the fat or fit for the future? 81 Sam Collins introduction 81 the ‘cuts’ model 84 Radical reform 92 Conclusion 98 References 99 5 Education, training and childcare 105 J. R. Shackleton State schooling 106 early schooling and childcare 113 training 116 Higher education 118 Conclusions 126 References 127 6 Comprehensive pension reform 130 Philip Booth and Corin Taylor Abolition of non-cash benefits to pensioners 131 Abolition of married couples’ allowance for old people 134 Abolition of the age allowance 136 Not linking UK state pensions to earnings from 2011 138 Raising state pension age to 66 in 2015 139 Reduction in public sector pension contributions 139 Comprehensive pension reform 141 Conclusion 147 References 148 PART THREE: THE WARFARE STATE 151 7 The fat red line: time to cut British defence spending 153 Paul Robinson introduction 153 Rational defence planning 154 Vital national interests 157 threats to vital interests 159 Creating a strategy to meet identified threats 161 Capabilities 162 the defence budget 165 References 167 PART FOUR: THE TRANSFER STATE 169 8 How to improve the lot of the poorest by cutting government ‘aid’ 171 Julian Morris Should OdA be increased? 171 Can OdA be spent in ways that do more good than harm? 179 Aid to cut and aid to keep 183 Conclusion 184 References 184 9 Transforming welfare – incentives, localisation and non-discrimination 186 Kristian Niemietz introduction 186 income replacement versus work incentives 188 Constraining spending versus constraining adverse incentives 189 Contribution versus ‘need’ 192 High spending, poor outcomes 193 the coalition’s welfare reforms: so far so good 196 Changes to the benefit system 197 A Negative income tax as an alternative to the Universal Credit 204 Old-age provision 206 Full-time work conditionality for out-of-work benefits 207 Conclusions and companion reforms 211 References 213 PART FIVE: THE INFRASTRUCTURE STATE 219 10 Comprehensive transport reform 221 Richard Wellings Rail 222 buses 229 Roads 232 Conclusion 238 References 240 11 Selling off the family silver 243 Nigel Hawkins introduction 243 Reprivatising the banks 245 Support services 249 transport and logistics 251 the utilities and energy sectors 254 Media 257 telecoms 259 Leisure 260 investment trusts 261 Real estate 261 Projected government proceeds 262 Conclusion 263 12 Seriously suboptimal: UK energy and climate change policy 265 Richard Wellings Climate change targets 266 the Renewables Obligation 267 the eU etS 268 environmental taxes 268 the impact on the energy sector 269 the impact on government spending 269 Meeting the targets at lower cost 271 An efficient carbon tax 273 implementation problems 274 the limitations of climate change policy 276 A market-based approach to climate change 277 References 279 About the IEA 284 AUTHORS Philip Booth Philip booth is editorial and Programme director of the institute of economic Affairs and Professor of insurance and Risk Management at the Sir John Cass business School, City University. He has written extensively on regulation, social insurance and Catholic social teaching. He is a fellow of the institute of Actuaries and of the Royal Statistical Society and associate editor of Annals of Actuarial Science and the British Actuarial Journal. He has also advised the bank of england on financial stability issues (1998–2002). Sam Collins Sam Collins is a political specialist who has worked for a number of politicians, lobby groups and think tanks in New Zealand, London and Washington. He worked for the institute of economic Affairs from 2010 until 2011 and aided a number of Conservative Party campaigns during the 2010 general election. He has previously co-authored ‘Regulating the labour market can be bad for your health’ (in International Labour and Social Policy Review, 2008), and ‘Green Monitor’ (pamphlet, Progressive Vision, 2009). Sam is currently a candidate for the National Party in the 2011 New Zealand general election. Nigel Hawkins Nigel Hawkins is an investment analyst who specialises primarily in the 11 sharper axes, lower taxes: big steps to a smaller state electricity, gas, water and telecoms sectors. He has worked in the City since 1988. He is a regular features writer for Utility Week and Cleantech magazines and frequently contributes to the financial media. Prior to joining the City, he worked in politics, including for three years as Political Correspondence Secretary to Lady thatcher at 10 downing Street. in 1987, he stood in the general election as Conservative Party candidate in Sedgefield against tony blair. Patrick Minford Patrick Minford is Professor of Applied economics at Cardiff University, where he directs the Julian Hodge institute of Applied Macroeconomics. between 1967 and 1976 he held a variety of economic positions, including spells in east Africa, industry and HM treasury. From 1976 to 1997, he was the edward Gonner Professor of Applied economics at Liverpool University. He was a member of the Monopolies and Mergers Commission from 1990 to 1996, and one of HM treasury’s Panel of Forecasters (the ‘Six Wise Men’) from 1993 to 1996. He was made a Cbe in 1996. He has written widely on macroeconomics and related policy issues. Julian Morris Julian Morris is vice-president of research at Reason Foundation, a non-profit think tank advancing free minds and free markets. Julian has degrees in economics and law and is the author of dozens of scholarly articles on issues ranging from the morality of free trade to the regulation of the internet. He has also edited several books and co-edits, with indur Goklany, the Electronic Journal of Sustainable Development. Julian is a visiting professor in the department of international Studies at the University of buckingham (UK). before joining Reason, he was executive director of international Policy Network, a London-based think tank which he co-founded. before that, he ran the environment and technology programme at the ieA. 12 authors Kristian Niemietz Kristian Niemietz is the ieA’s Poverty Research Fellow. He is also a Phd student, and a tutor in economics, at King’s College London. Kristian studied economics at the Humboldt Universität zu berlin and the Universidad de Salamanca, graduating as Diplom-Volkswirt (MSc in economics) in 2007. After graduating, he went on to work for the berlin- based institute for Free enterprise (iUF). Paul Robinson Paul Robinson is a professor in the Graduate School of Public and international Affairs at the University of Ottawa. He is the author of numerous books and articles on military history, international security and defence policy, including Doing Less with Less: Making Britain More Secure (imprint Academic, 2005) and Dictionary of International Security (Polity, 2008). J. R. Shackleton J. R. Shackleton is Professor of economics at the University of east London and an ieA economics Fellow. He has been dean of two business schools, taught at four universities and has worked in the Government economic Service. He has written extensively in academic journals and policy publications, has given evidence to parliamentary committees and has appeared many times on tV and radio. For the ieA he has written Training Too Much?, Trouble in Store? (with terry burke), Employment Tribunals and Should We Mind the Gap? David B. Smith david b. Smith studied at trinity College, Cambridge, and the University of essex in the 1960s.