Is the spending sustainable?


Sustainability is one of those modern buzzwords to which we must all pay homage. Is a business sustainable? Is a production process sustainable? Is it sustainable to consume a particular resource? What those concerned about sustainability seem not to ask is, how sustainable is the current level of government spending?

In looking at sustainability of finances, it does not makes sense to look at demand for services, which to all intents and purposes are infinite, but to look at the supply side – revenues. One of the remarkably stable economic indicators over the last thirty years has been the tax revenue as a per cent of GDP. For the UK this has never varied more than one per cent away from 35 per cent. The amount the government spends is of course highly variable, and the difference between the two is the deficit. The UK is not alone in seeing stable government revenues, across the developed world; government revenues are remarkably stable, from the high tax Denmark at 48 per cent, to the US at 24 per cent. Indeed it is notable that the developed world has seen only a very slight fall of 0.8 per cent in tax revenues since 2000, countries in general seem to have each found their own level of sustainable taxation.

Given stable revenues, balancing government budgets can be something of a challenge. Germany has announced with some pride that it is to balance its budget in 2015, largely as a result of not indexing its income tax thresholds, so bringing more and more of its citizens into higher rate tax brackets. This is the first time in 45 years that Europe’s most fiscally responsible country has managed to balance its budget. This is however a small adjustment to a huge budget.

Long-term government financial sustainability requires two things: an overarching appreciation that spending should be defined by revenues, not demand for services, and secondly, that sustainability means taxes must be seen as being fair by those who are paying them.

In general, politicians find it difficult to behave sustainably in good times and impossible to do it in times of stress. At the outset of the Blair government, chancellor Gordon Brown proposed a “Golden Rule”, where the government promised that, over the economic cycle, they would only borrow to invest, not to fund current spending. Clearly there was wiggle room – what counted as investment and timing of the economic cycle were both stretched over the years, and blown to pieces in the light of the credit crisis. The need to save in good times remains paramount.

Fair taxation means differing things to different people, but the people to whom any taxation has to appear to be fairest of all are those paying the taxes. Government revenues remain precariously dependent on a small number of individuals paying a lot of income tax, so keeping these people happy has to be a priority for any politician. Beyond income taxes there is an urgent need to review taxes from business rates to capital gains to taxation of pensions. The goal of any government has to be to promote long-term economic prosperity, not short-term revenue maximisation. There is evidence that, even at 35 per cent of GDP, UK taxes are damagingly high.

What does sustainability mean in terms of government finances? It means living within your means, and doing so without fiddling the figures. Government finances need to be added to the long list of issues, which need to be approached in a sustainable manner.

Twitter: @jamesrsproule

About author

James Sproule

James Sproule

James Sproule has been Chief Economist and Director of Policy for the Institute of Directors since January 2014. Prior to joining the IoD James led Accenture’s UK Research and Global Capital Markets Research. He started his financial career as a merchant bank economist working with both Bankers Trust, Deutsche Bank and Dresdner Kleinwort, and eventually helped to found the boutique bank Augusta and Company.

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