Utopian Future or Fiscal Reality?

Thursday 16th April: The Economy is now central to the 2015 Election battle, with party leaders lining up against rivals’ pledges. All appear to promise more government/public spending on favoured causes, and a change in tax regime, either higher, or more complex, or both. However, behind the pledges and the party politics are a number of fiscal fallacies, says the economist, David B Smith. He explains the economic flaws behind the political pledges. The consequences could be felt throughout the system in the years to come by  business, by people themselves and the wider economy. Not only is Britain's economy too small to sustain such high proportion of public spending levels, but by ignoring the rules of sound taxation, this country and its people will be all the poorer. As David B Smith writes:

The conceptual sophistication with which the public spending and tax options are being discussed in the pre-election political debate, strikes many economists and tax specialists as pitched at a sub-primary school level. A number of basic but inconvenient truths have been ignored by almost all the political parties currently lobbying voters. Here I set out ten.

Fixing Parliament Shuts Out Voters

Friday 10th April As this election rumbles on, getting increasingly boring by the day, the folly of the new Fixed-term Parliaments Act 2011 becomes painfully apparent. It is a good example of too much democracy, a constitutional change emanating from the Liberal Democrats and enacted as a term of the coalition deal.

Prior to the passing of the Act the Prime Minister had the power to decide when to dissolve Parliament and call a general election. It was in fact the exercise of the Royal Prerogative on the Prime Minister’s advice to Her Majesty - just the kind of ‘undemocratic’ power to which many Liberal Democrats are opposed. Two consequences flowed from that power: first, the threat of an election was often sufficient to persuade recalcitrant MPs to behave themselves; and secondly, it made the Prime Minister of the day think twice about calling a general election mid-term as he would run the risk of losing it. In 1973 Edward Heath called a snap election on the issue of ‘Who runs Britain the Government or the Trade Unions?’ The electorate gave its answer: it was not Edward Heath. There was further the danger to a Prime Minister who hung on too long until the very end of the five year term.

Real Faith is Bad Politics

Thursday 2nd April 2015: This week David Cameron donned his cassock to deliver his Easter message to the periodical, Premier Christianity. Besides the expected recital of the government’s achievements, Cameron addresses two more philosophical questions. First, he says that it is wrong for people – and he mentions in particular those in the Church – to criticize his government’s policies as ‘amoral’, just because they disagree with them. This is a fair point. There is a stereotype, which has wide appeal not just popularly but also, especially, to intellectuals, according to which socialist-leaning policies stem from altruism and more business and market-friendly ones from self-interest. But supporters of the market can reply, with Cameron, that they too aim to bring the social goods which those on the left value. And their policies, by promoting a flourishing economy, will bring them more swiftly and surely. They also might reply – though it is unlikely that Cameron would either dare, or perhaps even wish to – that there are different visions of a good society. One vision might favour competition, diversity, plenty of freedom to succeed or to fail and even allow luck, good or bad, to play an important role. Another vision might prefer a more equal distribution of wealth, more protection from chance, more restrictions but fewer dangers. Neither vision is more moral than the other (nor, despite what some in the Churches say, more Christian).

Your Good Health! Competition and Contribution for better healthcare and pensions

Friday 27th March: Britain's health service has become a central issue in the UK's coming election. However, the UK is not alone in the priority it gives healthcare and pensions. Across western economies, as governments prepare the budget for the coming financial year, they have one question in common. How can the economic priorities of growth, and fiscal reform, be accommodated to the demands by ageing populations for more healthcare and pensions? Here, Matthias Dauns a senior economist from Germany's Finance Ministry, explains some of the principles which guide successful systems.
As demand for healthcare and pensions rises with increasing life expectancy and higher proportion of retired to working age people, the design of social security systems will become ever more important. Not only must the constraints of the public finances be accommodated, but so too must countries' wider economic aims, including economic growth. For all of these reasons, effective and efficient social security systems will be central as policy makers and societies tackle the challenge of paying for the future.
In our new Politeia study, ​Paying for the Future: Working Systems for Pensions and Healthcare, we consider the evidence for financing a variety of different health and pension schemes - exploring the principles and policies on which successful systems are built and why. We focus on the structures most commonly used, contributory, tax-based and mixed and the distinction between Bismarck (contributory) and Beveridge (tax-financed) types. 
The aim is to establish which working systems are fiscally sustainable, cost-efficient and effective in meeting social goals while also supporting growth and employment. Because current demographic trends and their projected costs continue to be upward in industrialized countries, pensions and healthcare will account for a major, strongly growing proportion of public expenditure.
The evidence tells an interesting story. There are differences in the levels of expenditure which reflect the design of systems, their economic basis and how they are financed. In terms of overall GDP, tax based systems for both healthcare and pensions tend to be cheaper because governments can control expenditure better. Contributory and mixed systems are more expensive - often cross-financed with public subsidy, weakening cost containment.  Other measures matter and should be taken into account. Tax based systems tend to be more compatible with high employment even during old age. Contributory and mixed systems, however, tend to perform better and more strongly: they provide more generous pensions and better health services with more successful outcomes. 
What then are the principles to guide policy for a successful and affordable future?  

Productivity and Growth : Priorities for the new Parliament

Friday 20th March: The Budget confirmed that the economy is recovering, inflation is low, the deficit is falling and low borrowing costs have allowed old debts to be refinanced at cheaper rates. Also, according to the Chancellor's plans, there will be a budget surplus by the end of the next Parliament which would then allow the national debt to start falling from a higher level. That was the good news, says Dr Gerard Lyons, commenting on this week's Budget.

By sticking to his plans, the Chancellor has put a marker down for the Election with the post Budget debate focusing almost exclusively on deficit reduction and whether planned spending cuts outside the ring-fenced areas are justifiable or credible, who has suffered or gained and asking questions as to what would be the alternative.

Whereas the BBC has recently sparked an unnecessary and misleading comparison of public spending levels with the 1930s - not comparing like with like - perhaps it is the 1950s that warrants more attention. For, in that decade, Britain's post war debt levels became less of a worry, because of strong economic growth. Just as a mortgage needs to be looked at in relation to the value of a property, so too should debt be seen in relation to the size of the economy, as measured by debt to GDP.

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