How we’re all being seduced by the state

Neither Osborne nor his critics are recognize that the state is strangling both individual and capitalist initiative

by Rob Lyons 

The UK chancellor of the exchequer, George Osborne, presented his annual autumn statement last Wednesday. Most attention was paid to the fact that Britain’s public-spending deficit is forecast to fall in this financial year - just. Osborne’s target for getting rid of the deficit - and thus being in a position to start paying off the accumulated national debt - has been pushed back again. The five-year plan he set out in 2010 to get government finances in order has now become a seven-year plan.

Things could have been even more embarrassing for Osborne. Were it not for the estimated £3.5 billion proceeds from the auction of 4G spectrum - that is, new frequencies being made available for superfast mobile internet connections - the deficit would actually have risen in this financial year. As it was, Osborne could claim, against all expectations, that progress on the deficit was still being made - a fact which seemed to leave his opposite number, Labour’s Ed Balls, stumbling in the House of Commons.

But no one should be under any illusions: Britain’s economic situation is still far from rosy. The economy is forecast to have shrunk slightly over the course of 2012, at a time when economies coming out of recession are usually starting to grow relatively strongly. Future growth forecasts have been downgraded, too. The government is forecast to need to borrow £121 billion in 2012-13.

Still, one thing has changed in recent months: there is now a degree of recognition that the fiscal mess cannot be solved while the economy as a whole is stagnating. It has become increasingly obvious to commentators and politicians that if GDP is going nowhere, then tax receipts will go nowhere, too (a point that has been frequently made on spiked over the past few years). Unfortunately, this recognition has not translated into a strategy for growth. Indeed, a review of government policy by Tory party grandee Michael Heseltine, published in October, bemoaned the fact that the government had no growth strategy. While Heseltine’s own proposals were mostly a rehash of much that was tried in the 1980s, at least he demanded making the promotion of growth central to the work of government.

True, Osborne announced that one per cent - about £5 billion - would be taken from departmental budgets over the next two years to build more roads and schools. Corporation tax will be reduced from 22 per cent to 21 per cent. There are also previously announced plans for a virtual bank to improve the flow of credit to businesses. But this is pretty small fry for a moribund economy.

In truth, there’s not that much room for the state to involve itself further in the economy because the public and private sectors are already so closely entwined. Many private businesses are heavily regulated by government. Rail fares, for example, are regulated by the state, even though the rail companies are privately owned. On the other hand, a lot of public spending is delivered by private companies, whether it is outsourced catering contracts or private-finance initiative (PFI) deals for schools and hospitals.

But one useful role government could play - one that might take a few years to bear fruit - would be to help create the conditions for renewed growth. Cutting regulation and taxation might help. Promoting research, from basic research in our universities to smoothing the way for commercial research and development in the private sector, would have long-term benefits. Actually pursuing some clear policies on everything from energy policy to infrastructure would provide more certainty for private investment. And since British businesses are, apparently, sitting on cash stockpiles of £700 billion that are not being used to create or expand economic activity, there seems plenty of scope for greater investment.

The trouble is, the government hasn’t really been doing very much of anything either to tackle the immediate crisis or to create the basis for long-term economic success. For all the talk of years of austerity ahead, the fact is that day-to-day public spending has been going up, not down. It is capital spending that has been slashed (by over £9 billion in the government’s second year in office - a policy inherited from the last Labour government). Public services and benefits have not been heavily affected yet. Osborne has now announced that welfare benefits will only rise by one per cent per year for the next three years - significantly below the rate of inflation - after being index-linked at a time of relatively high inflation. Even then, other measures will help people in work, particularly an above-inflation rise in income-tax allowances. Overall, Osborne’s latest plans are roughly revenue-neutral, satisfying neither those who would slash spending nor those demanding a Keynesian-style fiscal stimulus.

The use of the word ‘austerity’ needs to be questioned. In 2001, the year Tony Blair’s New Labour government was re-elected, public spending was £7,340 per person. By 2007, before the financial crisis really hit, it had risen to £9,167 per person. By 2011, it was over £10,000 per person. (All these figures are adjusted for inflation.) State spending is now equivalent to 45 per cent of UK GDP. It is only now that spending is starting to fall and it is not expected to drop back to 2007 levels in the foreseeable future. This is hardly comparable with the austerity being experienced in the weaker Eurozone countries like Ireland and Greece. The Irish governmentannounced a further austerity budget only last week.

Yet this hasn’t stopped a hyperbolic overreaction from many liberal commentators. In yesterday’sObserver, columnist Will Hutton declared that Osborne’s plans represented the end of any sense of shared social responsibility: ‘The last vestiges of an approach to organising society based on a social contract have been shredded. In its place there is an emergent system of discretionary poor relief imposed from on high in which every claimant is defined not as a citizen exercising an entitlement because they have hit one of life’s many hazards, but as a dependent shirker or scrounger.’

In reality, all roads seem to lead to the state. As the Office for National Statistics pointed outearlier this year: ‘On average, households in the top two income quintiles paid more in taxes than they received in benefits, while households in the bottom three quintiles received more in benefits than they paid in taxes.’ In other words, most people receive more money from the state than they pay in taxes. The welfare state, originally envisaged as a safety net with a substantial contributory element, has been transformed into a dependent relationship with the state that extends far beyond the unemployed.

One study quoted in The Sunday Times yesterday, illustrates this. ‘Using OECD figures, the study says that an individual with a wife and two children earning 50 per cent of the average wage will have gross pay of £17,150. After deductions of £2,135 in income tax and £1,258 National Insurance, the family will be left with £13,757. They will then receive £3,952 housing benefit, £6,897 in family-related benefits and £416 in in-work benefits. The total net take-home pay including the benefits “uplift” is £25,022 - 82 per cent higher than the post-tax pay.’

If those figures are correct - they were prepared by Migration Watch from OECD figures as an argument against immigration, so they may well be a worst-case example - it hardly represents the tearing-up of the social contract, as Hutton believes. Nor does it mean we live in a scroungers’ society - the beneficiaries in the example above are as much businesses that can pay low wage rates knowing that the state will top them up into something approaching a ‘family wage’. What they do illustrate is a relationship, between the individual and businesses on one side and the state on the other, which distorts incentives and undermines autonomy. The culture of entitlement and dependency affects capitalists just as much as it affects individuals.

There are plenty of opportunities for the state to help kickstart the economy in ways which are not necessarily profitable for any one firm or affordable for any one individual, from building roads to supporting innovation. It is also right and proper that there should be a safety net when people lose their jobs or become ill. But beyond that, it would be far better for the state’s role in society to shrink, in order to allow initiative, both personal and commercial, to flourish. At the very least, a wide-ranging examination of the proper role for government in every aspect of society is long overdue. George Osborne’s autumn statement did nothing to bring that about.