State Handouts Should Be Cut To The Absolute Minimum

Oliver Twist

Here's something sent in by our Highly Political Professional

The UK government makes much of its austerity plan, telling us that it is essential to the UK’s credibility in the markets to demonstrate control over the public finances. The Labour Party, of course, claims that the government has cut too much and too fast. In my view, both views are partially right.

Here's some truisms.

First, it is our money the government spends. It comes largely from taxpayers (or borrowing which is ultimately repaid by taxpayers). Secondly, government tends to spend money less efficiently than the private sector. Thirdly, government payments to individuals generate economic activity. If the payment comes in the form of a handout, that's the only benefit to the economy – it is a very low-geared effect. If the money is paid as a salary or for services, however, it will also generate tax receipts.

If the government’s spending is on capital investment rather than just on services, it has the even greater attraction of creating demand in other areas – for all the businesses involved in supplying and delivering the project – as well as creating an asset (road, rail, airport, etc) which helps generate additional economic activity now and in the future.

There is a problem though - government is rarely good at choosing the right infrastructure investments - politics tends to get in the way. Moreover government spending on infrastructure can 'crowd out' private sector spending. So, in general, it is best if government steers clear of infrastructure investment itself.

There are exceptions though. Government can have a role in very large projects with long pay-back times, or where it is difficult to allocate costs to the end-users. That role may be in paying for the project, or better, in helping the private sector with funding, guarantees, planning, etc.

So I am advocating that state handouts (benefits) should be cut to the absolute minimum, services cut to what is essential, and spending on large infrastructure projects (in conjunction with the private sector), brought forward urgently.

So what has the UK government done so far ?

Well, it’s made a start on the handouts. But it's not doing so great on red tape, where government is still involved in far too many areas of our lives, stifling the economy and costing us money. And it's doing really badly on investing in infrastructure projects. With long term interest rates at an all time low, the government could be borrowing 30-50 year money to invest in long term revenue generating projects which will pay for themselves over time, while giving a massive boost to employment and the economy in the short term. Coupled with more austerity in hand outs and a reduction in services, this should be cost neutral – and over time revenue positive.

What we have at present is drift - not enough action on costs and services, too much red tape for business and too cautious an approach on investment. In short, we are on the road to nowhere.