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Lord Skidelsky: My Lords, on behalf of the whole House, I congratulate the noble Lord, Lord Howard of Rising, on his eloquent and thoughtful maiden speech. He certainly managed to combine a large number of arresting statements within the convention that maiden speeches should be non-controversial. We look forward to his future contributions to our debates based on his wide experience of business life, local government and rural and heritage affairs.
I come to this debate with some form. In a book which was published in 1995 I wrote that,
"a democratic state . . . which spends no more than 30 per cent of GDP is one that could enable a great deal of good and do comparatively little harm".
The implication of that was that the democratic state would start doing harm if it spent much more than 30 per cent. Ten years later I am wondering whether I still believe this. The question is of no great interest to anyone but myself, but intellectual honesty can, perhaps, add a smidgeon of value to our discussion this afternoon.
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The figure of 30 per cent was not of course plucked out of the air. It was the average share of GDP spent by governments in the OECD world in 1960, after it had come down from its very high levels during the war. It was what governments in our kinds of societies spent during the so-called "golden age"—a kind of mid-century equipoise which started to unravel almost immediately afterwards. The OECD government share rose to over 40 per cent by 1980—that is a 10 per cent increase—and has continued to rise, though at a much slower rate, ever since. Britain, in fact, has been exceptional in holding to the 1980 share of about 40 per cent, though it has started to creep up again.
One must not think of the increase since 1960 as one in which all items of spending rose in the same proportion. Within the overall total there has been a large shift after 1980 from spending on "economic services" to "social services". Privatisation and the ending of subsidies to industries and regions freed up resources for social security—which includes pensions—health and education. The share of these "big three" in the budget rose from 45 per cent in 1979 to 60 per cent today. But—and this is the crucial point—public spending on these three items has been rising faster than the national income, at an accelerating rate since 1997. And that is why the share of state spending in national income is what it is now.
That the proportion of national income spent on health, education and pensions should have been going up is not in itself surprising. It reflects changes in demography and increasing demand for certain types of services. That is true of all wealthy societies. However, it is not inevitable that this increased demand should be met mainly from taxation. Indeed, the commonsense expectation is that as societies become richer, an increasing proportion of spending on the "big three" will come from private sources.
The reason that that has not on the whole happened is because it was decided long ago that our main social services should be financed through the tax system. That has not only retarded the growth of private sector alternatives, but it has made it extraordinarily politically difficult to shift some of the payment back to private individuals and households—just think of the row over university fees. And the so-called "transitional costs" of shifting to a privately based pension scheme are horrendous. So, in a sense, we are trapped by all of the past decisions that we have made on these matters over the years.
However, the conclusion seems inescapable. If we go on paying for the social services in the way we have been, or, to put it another way, unless we introduce some element of private payment into the system, public spending and therefore taxes will go on creeping upwards, whatever "efficiency savings" can be conjured up on the way. Is that a prospect that we really want to face?
My question is: how much does it matter whether rising demand for social services is met from the public or the private purse? Today, arguments have been put forward by the advocates of low taxation, some of which are not really very good. Within a wide range,
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there is no connection between levels of taxation and rates of economic growth. Here I must differ from the noble Lords, Lord Blackwell and Lord Lamont. The statistical basis of such comparisons is very shaky; not enough observations have been made, and they have not been made over a long enough period of time.
While we are in the business of inferring consequences from dodgy statistics, let me add to it. The United States is often cited as an example of an economy rendered more dynamic by relatively low rates of taxation; its government spends only about 34 per cent of GDP. But Japan, whose share of public spending in GDP is about the same, has been virtually stagnant for 15 years. I do not believe that one can draw amazing conclusions from that, but at any rate it shows that we can all bandy statistics around.
In a recent Politeia pamphlet, the economist Vito Tanzi observes:
"The countries that allowed their public spending to grow significantly more than other countries do not show better quantitative results for"—
a range of "socio-economic indicators".
That is a careful statement, because what it means is that neither do they show worse quantitative results. So that cannot be an argument in itself for lower spending.
A second argument is that lower taxes increase the incentive to work harder, and thus produce higher incomes and therefore higher revenues for government. That was the basis for the famous, or infamous, Laffer curve. But the proposition is far from self-evident. Let us suppose that someone aims for a post-tax income of £50,000 a year. The higher the tax one pays, the harder it will be to achieve that goal. Will one's reaction be to work harder or less hard? It is argued that what is important is the marginal rather than the average rate, but I doubt that people deliberately aim to depress their pre-tax incomes to avoid paying tax at a higher rate.
A third argument is that public services are inherently less efficient than private services. That is a more compelling argument, but it must be recognised that if markets have become more sophisticated in meeting social demand, the state has also become much smarter in meeting public expectations. It has been forced to respond to the challenge of the market. A good example of that is public/private partnerships, when a government use private contractors to build, maintain and in some cases run publicly financed institutions. Another example is the Prime Minister's rejection of what he calls the "bog-standard comprehensive" in favour of a variety of state schools offering parents choice. Offering vouchers would be a logical next step down that route. The whole idea of "quasi-markets" in the public sector was developed by left-wing academics such as the noble Lord, Lord Plant, precisely to meet the privatisation onslaught of the government led by the noble Baroness, Lady Thatcher.
In conclusion, I return to my earlier question: does it matter whether people spend, say, 30 per cent of their pre-tax incomes on healthcare, education and pensions directly, or whether they give it to the state to
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spend on their behalf? I ask that with the proviso that the state continues to support those who cannot support themselves. Advocates of lower taxes do themselves a great disservice by concentrating on the economic case, because that is doubtful. The argument has to be made on the basis of political philosophy and morality.
The first point—and here I agree with what other noble Lords have said so far—is the argument for individual liberty. There is a strong historical, logical and in my view entirely valid connection between personal liberty and private property. That has always seemed to me to be the strongest argument for redistribution of property—that is, actual property, and not just redistribution of entitlements to specified income streams. The point about private property is that it does not entitle people to this or that but actually extends their freedom of action. That is why the "right to buy" policy of the 1980s was the most significant breakthrough for personal freedom since the Second World War.
The second argument is about dependency, and how much responsibility people should take for their own lives and the consequences of their actions. The very argument that it makes life easier not to have to think about the education of one's children, one's old age or the effect of one's lifestyle on one's health, because those matters are taken care of by lump payments to the Exchequer, diminishes the moral stature of human beings. We were all brought up to believe that the great end of economic development was to emancipate human beings from dependency which shrank their possibilities for moral growth. However, we are still tethered to systems of social dependency which were devised at a much earlier period to deal with the problems of that time.
So, on balance, I still believe what I wrote 10 years ago. I know that there are moral arguments on the other side, based on considerations of equity and fairness, and those cannot be shirked. I know that the Labour Party will always attach supreme value to those arguments. But the value that I myself attach to personal individual liberty and moral autonomy continues to make me believe that,
is a worthy target for any political party to aim for, however great the practical difficulties in achieving it.
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