The Tax Burden

Austerity spending cuts are driven more by the current government's ideological commitment to reducing the tax burden than their desire to reduce the deficit.

This graph uses Eurostat data to show how the tax burden/GDP has changed (and is forecast to change) for a range of countries.

The UK is the only one of these countries to have materially reduced its tax burden over this austerity period.

Now let's look at indexed real total government spending over the same period

The relative severity of the UK's spending cuts is clear - only the extreme cases of Ireland and Greece (and to a lesser extent Spain) have suffered more.

I've kept the index scales the same so we can visually appreciate the difference between these two trend lines. If there was no GDP growth the sum of these two lines would roughly¹ show us the trend in deficit. Of course in reality GDP growth acts as a multiplier to dampen (or potentially reverse) the trends we see in the first graph, so a key judgement call is whether the reduction in tax burden drives GDP growth more than the associated reduction in expenditure slows it.

So let's look at the net outcome of all of this in terms of deficit/GDP;

I would tentatively suggest that those countries which have been willing to use taxation to fuel spending (or at least haven't reduced spending to enable tax cuts) are currently seeing a better net outcome in terms of deficit reduction.

The core "anti-austerity" argument is that government spending is a key driver of economic growth, so to cut spending during an economic slow-down (and particularly when interest rates are close to zero) is damaging to the economy. It strikes me that if you look at the data it shows that the main driver of reduced spending in the UK is the obsession with reducing the tax burden. I wish more politicians had the courage to address that issue head-on.

Now of course if you're ideologically committed to reducing taxes you might argue that this is all well and good. Nobody wants to pay more tax in the same way that nobody wants austerity - and there are plenty who believe we should live in a lower tax / lower spend economy. I don't share that view, but I can understand it.

But even those who believe that a government's primary objective should be to reduce the tax burden (as opposed to, say, caring for the least well-off in society) must surely question the timing. Should we be reducing taxes and therefore reducing spending at a time when most would agree that the economy would benefit from increased government spending "if we could afford it"?

I've commented before that CEOs - who should be focused on long-term shareholder value - are actually incentivised to maximise "CEO lifetime remuneration value". I suspect most chancellors are in a similar situation; they are incentivised to make policy decisions which improve their chances of short-term political success rather than serving the long-term interests of the economy. Cutting taxes is awfully popular - as long as voters don't draw the connection between this and the hardship caused by "austerity".

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A confession: the more astute among you may be asking why these graphs start in 2008 and why I've used indexed data in two cases. The answer is simple - it serves my argument best to present the data that way. It's all true, but unlike my previous post (> Who's Really Against Austerity) I have presented the data here in a way to help me make a (valid) point. I recommend you read that previous post if you want to see a less agenda driven presentation of the figures (and see some very interesting and informative comments posted in response )

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1. Tax burden represents c.90% of the UK's total revenues and the only cost excluded from the expenditure graph is debt interest

Look at our GDP/Capita; Look at Ireland

This post is a distraction from the main argument but I have felt compelled to write it in response to some of the more ill-informed Twitterati...

I don't have the time or energy to go off on a massive side-bar analysis of UK versus Ireland and the impact of the financial collapse, bailout and austerity measures on the people of Ireland.

There's a good reason why the SNP don't point to Ireland (or Iceland) anymore as their exemplars of what an Independent Scotland could look like. Most people get that it has been pretty nasty, so it's a pretty niche argument I'm responding to here.

More generally I think those who quote GDP/Capita figures in an effort to make some vaguely undefined point about how Independence would "make us richer" are wide of the mark for many reasons. I'm not going to start explaining (and to be fair in many case understanding) the myriad of different measures that you would need to look at to make a balanced assessment of "in which country, over what period of time, who is 'better off'?"   Well not in this post anyway;  IMHO it is a distraction from the actual question that matters: "what will change for Scotland if we separate from the UK?"  [See my posts linked on the right for more focused analysis on that - far more relevant -  topic]

I'm sure someone with more time than me could find some better data and more rounded perspectives; I'm not going to expend more energy on this question so let me just throw this out there

1. For those who believe GDP/capita is the "best" measure
I'm not arguing that GNP is the best measure ... but it's arguably a better measure of how the nationals of a country are faring.  Ireland ranks behind the UK on this measure but I don't draw any conclusions from that; it simply illustrates that it is easy to find measures with rankings to support different cases if that is the game you choose to play (I don't).

Source: Diffen

Update 1: since I originally posted this following article was published in the Guardian which elaborates on this very topic:  New Doubt Cast Over Alex Salmond's Claims of Scottish Wealth 

Update 2: since I originally posted this I stumbled across the Tim Harford article below;

Update 3: this analysis by economists John McLaren & Jo Armstrong reinforces the GDP/GNP point with actual figures for Scotland > Scottish Independence: 'Richest Country' Claims Disputed


2.  For those who say "whats wrong with just comparing GDP/Capita"
Extracted from The Impact of Anti-crisis measures and the social and employment situation: Ireland

• "GNP is a better guide to per capita income but even it barely rose and has fallen, by 15.3 % from peak. A far better way of evaluating real economic welfare is to examine domestic demand [...] it fell by a massive 24.9 % in four years. Other indicators of falling demand include falling retail sales, falling tax revenue (when rate increases are excluded), falling employment (down by 306,000), falling employment participation (down from 64 to 60 %), rising emigration, rising long-term unemployment (now 56.3%), rising under-employment (currently 25 %), rising business closures (up 20 % last year), and falling confidence, as orders fall per the purchasing managers' index. The economic collapse is the main cause for this fall in domestic demand, followed by the failure of the private banks" Dr. Peter Rigney, Feb 2012

3. If you want to look at some broader factors the OECD Better Life Index is pretty interesting

Examples from the Better Life Index:

• "Money": 
• In Ireland the average household net-adjusted disposable income per capita is $23,721 vs. $25,828 in the UK
• "Employment": 
• 59% of people aged 15 to 64 in Ireland have a paid job compared to 71% in the UK
• 62% of men are in paid work compared to 76% in the UK
• 55% of women are in paid work compared to 66% in the UK

I've chosen those two areas to illustrate my point, not to draw conclusions. My point is precisely that it is lazy and weak-willed to leap to snap conclusions from a handful of simplistic measures; I'm sorry, but it's just more complicated than that. 

4. For those who may not have noticed what has happened in Ireland since 2007

• " in November 2010 the government had to seek a €67.5 billion "bailout" from the EU, other European countries (via the European Financial Stability Facility fund and bilateral loans) and the IMF as part of an €85 billion 'programme'. The Irish State assigned €17.5 billion to this 'bailout' an amount that was equal to the Total Discretionary Portfolio of the National Pensions Reserve Fund."Wikipedia (I know... I don't have time to go a level deeper for primary sources)

5.  For those (like the risible "@bizforscotland") who fire out Tweets like this (as if its making some kind of point);

If you look at the actual original Forbes table "best countries for business" it clearly explains that it's  "based on country’s major stock index returns for 12 months through November 20 [2013]".  Do I really need to spell this one out?  The Irish stock market has still lost about 50% of its value since 2008 even following the growth in 2013; hardly a great case for mimicking that particular Celtic Tiger is it?