Guardian Records presents: Best of Public Spending Fallacies (Greatest Hits Vol. 1)

published on the Institute of Economic Affairs (IEA) Blog, March 2011

In providing a pseudo-rationalisation for last Saturday’s march against mathematics, the Guardian has assembled a video documenting a variety of supposed ‘alternatives’. The ideas presented differ substantially from one another, but they share one common notion: the cuts are wholly unnecessary because there is loads of money which the government could mobilise in a pain-free way. It just takes some courage and ‘thinking outside the box’.

For the campaign group False Economy, public spending is like preventive healthcare: if you short-sightedly cut back on prevention, you may well end up with much higher health bills, treating illnesses you could have avoided. Accordingly, if we cut back on education, healthcare and social workers today, we will end up with a less educated, less healthy and more violent population tomorrow.

But if this metaphor is accurate, how is it that we could ever get into this mess? We should by now be reaping the social dividends of a decade of relentless public spending increases. Government expenditure rose by more than ten percentage points of GDP. We can disagree over whether this is a good thing or not, but one cannot make the case that it has strengthened the public finances.

The reason why public spending has a tendency to spiral out of control is precisely that decision-makers do notact like owners, maximising the value of their assets. Public spending is driven by the political considerations of today, not the long-term fitness of the nation.

The video would be incomplete without UK Uncut, with their assertion that the public coffers would be boiling over if only the big corporations stopped dodging taxes. Tim Worstall has refuted their fallacies here, so there is no need for replication. Suffice it to say that one can make the case, as UK Uncut does, that a German subsidiary of a UK company should pay UK taxes on their activities in the German market. But what if the German government then used the same logic to reclaim the tax revenue from British subsidiaries of German companies? The supposed free tax-revenue lunch could then turn out to be very costly.

Another supposed free lunch is the Robin Hood tax on financial transactions. According to its advocates, nobody would really feel the tax because the proposed rate is so tiny, but the sums collected would still be colossal. The Robin Hood tax is based on the caricature of greasy financial speculators, who move millions of pounds around, and somehow end the day with a lot more money than they started with. Nobody really knows what these people are doing, but everybody knows that it is somehow very, very wrong. Drop that assumption, and the Robin Hood tax becomes just another tax discouraging productive economic activities, ultimately paid for by every depositor and saver.

Perhaps the worst of all fallacies is the notion that massive public investment programmes, plastering the country with wind turbines and solar panels, are the fast track to prosperity, full employment and ultimately a balanced budget. Of course, what this really means is reshuffling resources from producers of goods and services which people want (hotels, cinemas, gambling outlets, gyms, pubs…), to producers of goods and services which people don’t want.

Stories of hidden pots of gold have fascinated us for centuries – the Grimm Brothers’ fairytales are full of them. We should leave them there, not mix them into our economic policy debates. The only way to get a public sector of Swedish proportions is to pay taxes of Swedish proportions. I did not see any banners demanding that last Saturday.