David Laws has recently received much favourable publicity in the Conservativepress for advocating further spending cuts and tax cuts. He wrote:
Future UK governments should consider a further substantial real rise in thepersonal tax allowance, along with lower marginal rates of tax at all incomelevels. This can be paid for over time by continuing to reduce the share of public spending in GDP
[E]ven after the existing fiscal consolidation, statespending will account for some 40% of GDP, a figure that would have shockednot only Adam Smith, Gladstone and J.S. Mill, but also Keynes and LloydGeorge. The implication of the state spending 40% of national income is thatthere is likely to be too much resource misallocation and too much waste andinefficiency.
” (David Laws, ‘The Orange Book: Eight Years On’, Economic
Affairs 32:2 (June 2012) 31 at 34).Perhaps the enthusiasm of readers of the Tory press might have been dampened if their journalists had allowed them to read some of the other things Laws wrote, forexample:
If economic liberalism has proved itself over time as the best guarantor of wealth creation, it has proved rather less successful in delivering the society of opportunity that many liberals would like to see. Too often, free marketcapitalism has been associated with gross inequalities of wealth, income andopportunity. No liberal can be content to live in a society where life chancesare determined more by family background and parental income than bynatural ability.Milton Friedman claimed in his famous book
Capitalism and Freedom
(1962)that capitalist societies would be meritocracies, in which social mobility wouldbe high and in which everyone would enjoy opportunity. While it is true thatmost liberal societies are increasingly meritocracies where people are judgedon their personal worth and not on their race, class, creed, sex or sexuality,the sad fact is that the chances of acquiring merit are grossly unequal.
But leaving to one side the ideological debate about meritocra
cy, Laws’ assertionthat public spending at 40% of GDP leads to “too much” resource misallocation and
inefficiency, although itself rather imprecise and politically calibrated for serious
analysis (“too much” for what and compared to what?), does prompt th
e question of what we know, as a matter of empirical fact, about the relationship between publicspending and economic growth. Is Laws right to imply that reducing the overallshare of public spending in GDP will lead to greater prosperity?