Thursday, April 17, 2008

Binge Government

The OECD's Ireland Report (summarised here) paints a sobering picture of the challenges we face in the short, medium and long term. The challenge that caught my attention was government spending - here's what they have to say about the trend shown in the chart:
Public expenditure increased by around 15% in nominal terms in 2007. Spending growth is expected to moderate in 2008 as a stepping stone to annual growth of around 5-6% in later years. This requires a substantial change of pace after the rapid catch-up growth in earlier years: the increase of government expenditure from 2000 to 2006 was second only to Korea in the OECD. Such large and sustained increases in public spending have rarely been experienced in developed countries since the 1960s, even if the share of government spending in national income remains low by OECD standards. Although the pace of growth will be very much lower than in recent years, the rate of expansion will still be faster than in most other euro area countries.
In other words: our politicians lost the run of themselves, 'binge spending' as the nation binged on drink, debt and drugs. But the party has come to an end and the mess has to be tidied up. But the Government is in the same situation as the hungover host who has run out of paracetamol; it hurts. The Government's analgesic of choice is, of course, taxation. But the taxpayers are not prepared to spend more when they feel that what's been handed over to date has been squandered. The OECD itself points to spending on healthcare: which rose by 64% in real per capita terms between 1999 and 2005. Few would consider it the most efficient or effective use of taxpayer resources all things considered.

So the OECD focuses on greater public sector efficiency, higher productivity, reduced pension commitments and greater competition. All of which have been proposed before: but as the OECD freely admits in its report, much of what it has recommended in the past has been ignored or - worse - the opposite strategy has been adopted.

Perhaps then we need something more radical? I listened recently to a presentation by the President of Estonia, Toomas Hendrik Ilves, when he was in Dublin earlier this week (you can catch a flavour of his intelligent and refreshing style from this RTE interview). Estonia has a flat tax equal to 21%. No allowances, no mortgage interest or pension contribution reliefs, and no grotesque, Kafkaesque, form-filling bureaucracy overseeing it all. Countries like Russia have had a flat tax for some time, and Germany is taking a serious look at it. It may even be on the Conservative agenda for the next UK election.

The advantage would be to cut the cost of both collecting and paying taxes, and to facilitate a real political debate about just how much tax we are prepared to pay as citizens - and what we will get in return. And our politicians won't even have to switch over to a flat tax overnight: just run the two in parallel and let the consumer-citizen choose. Even the OECD might approve.

No comments:

Post a Comment

Related Posts Plugin for WordPress, Blogger...