August 25, 2002

Don't bother trotting out that 'back to the big bad 80s' line

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The question is whether we can afford the types of public services that we want if the price is abandoning the economic blueprint that allegedly served us so well in the past few years.

Most argue that increasing government spending today when the economy is weak would be the wrong thing to do. The mantra these days is “Spending today bad, spending tomorrow only marginally better, spending nothing at all best”. This is a rather obscene interpretation of economics in that it renders obsolete the idea that a government can make smart choices about what it wants. It also overlooks the fact that all government spending is cyclical. When things are going well, the public spends more and the government can spend less. When things go pear-shaped, the public saves and the government spends with a view to paying back the cash when the cycle turns and the good times roll again.

Apart from overlooking the cyclical nature of things, it can be argued that the ‘lower taxes at all costs’ mantra fails to pass even the most basic philosophical or analytical test. It might be heretical to question this mantra, but let’s be heretical. Is there a plausible economic case for ongoing increases in government spending and ultimately for higher taxes to finance it?

The common-sense answer is yes. Most countries that spend more on their public services than we do have better public services as a result. We all know the arguments. We’ve all seen the examples — whether it is the Canadian health service, the French transport system or Australian roads. We also know that the excellent US road network was planned and built with state funds largely in the 1950s and still is maintained by state funds. We are also aware that the privatised British rail network, with its perverted ownership structure where one crowd owns the track and another the rolling stock, is a shambles. The old adage of peanuts and monkeys comes to mind. Basic cop-on tells us that if our teachers are paid less than our second hand car salesmen, we will ultimately be left with stupid kids driving fast cars. Alternatively, if we want a health service, education service and a decent housing market, it is quite likely that the state will need to provide at least some of these services. This appears to be common sense.

The underlying philosophy which dictates that new taxes are wrong, rests on the premise that men are rational and act in their own self interest. This is plausible up to a point. Yet a cursory glance at what makes up a functioning society indicates that we are not a bunch of lonely rational beings acting in isolation of the society around us. Economic theory suggests that we all maximise the financial return from anything we get involved in. In the world according to Adam Smith, the ‘invisible hand’ of the market sorts out everything. But our everyday lives are littered with examples which show financial return does not dictate everything we do. We join clubs, we take other people’s children to the park and most of us go out of our way to help others, spontaneously. Many people involve themselves in voluntary organisations. Many of us have jobs on a similar salary scale and yet we do not temper our every act according to the financial return we will get. (In fact, it is soul destroying to work in an industry where the end of year cash bonus dictates one’s every move.) The point is that our society operates in a series of sophisticated personal relationships of varying intensity, almost none of which are exclusively dictated by financial return or maximising some selfish concept of utility.

The sight of the elderly dying in hospital corridors or waiting months for hip replacements upsets us. We also know that our kids are being killed on substandard roads with no proper signage. We understand that if you take money out of education our children will suffer. We also see from Britain how privatised education creates a two-tier property market where the price of houses in areas with good schools goes up — we know the score both philosophically and practically.

Analytically, the ‘no new taxes’ argument also fails to convince. When anyone suggests that taxes should be raised they are immediately accused of wanting to drive the country back to the 1980s. Again, a bit of analysis tells us that this 1980s threat is lazy sloganeering in place of hard thinking.

There were specifics in the 1980s that do not exist now, such as a floating exchange rate, limited savings pool, capital flight, capital controls and a high dependency ratio. The economy was in the middle of a serious transition with much reduced levels of foreign investment against a background of a serious national debt and an interest rate premium built into Irish assets to insure against devaluation. It is a different world today. Those who peddle the ‘return to the 1980s’ argument against the provision of adequate public services for our first world country are in very dodgy territory. European Monetary Union has changed the rules forever; there is no going back now. If we are to have recession it will be of the US variety where asset prices fall – as our stock market has for all intents and purposes since 2000.

The real issue is at what point would higher state spending and commensurate taxes affect our economic performance? Nobody knows the precise answer to this but it is safe to say that international evidence would caution against government spending rising above the average for Anglo/American economies — just over 40 per cent of GDP. The latest OECD figures indicate that our government spending accounts for just over 30 per cent of GDP (lower than the US). This 40 per cent ballpark figure gives us 10 per cent of GDP or €11 billion which we might spend. By remaining within the Anglo/American guidelines, there is a very good chance that we could combine Canadian health services with American dynamism.

Looking forward, it is more likely that structural factors — such as demography and capital intensity — will determine our growth rate, rather than marginal tax rates. Moving up the so-called value chain means making a self-confident choice about the economy. No society can exist indefinitely with impoverished public services, nor can we always promise ourselves jam tomorrow because, as John Maynard Keynes said of economic crystal ball gazing, “In the long run, we are all dead”.

David McWilliams presents the Breakfast Show on Newstalk 106, 7-9.30am Mon-Fri.

Should we worry about government spending, wage increases and the like? In short, should we worry about jam today? This is what many commentators have spent the past few months focusing on.