How Cameron’s tax giveaway will end up costing you more

Whichever way you look at it, tax cuts cause losses for all. PA Wire

One of the Conservative Party’s major promises to emerge in its party conference was the promise of tax cuts to reduce the burden of government on hardworking families who do the right thing. Many critics have pointed out that these cuts would benefit the rich more than any other group.

And this may well be the case, but to focus on this criticism obscures a more fundamental one: what the prime minister offered in his conference speech was not a tax giveaway. With the exception of the richest in society, tax cuts increase the burden on the taxpayer, they do not reduce it.

This is because tax cuts mean expenditure cuts (the chancellor is quite clear on this point). In turn, expenditure cuts result in households having to privately fund what the public sector no longer provides. And for almost all of the goods and services now funded by taxes, the public sector is a more efficient supplier than the private sector.

In short, tax cuts result in a shift in provision from the more efficient to a less efficient supplier.

An efficient public sector?

Everyone knows that the public sector is bureaucratic and inefficient, so how can I argue the reverse? To begin, note that most tax revenue collected from UK households goes to fund social expenditures (pensions, health, education and social support), about 75% in 2014. When funding is reduced, this results in less provision: a lower pension, longer NHS waiting lists, larger class sizes and less support for the poor. And households must then attempt to purchase the same services privately.

For those households that cannot afford to purchase a social service privately, a tax cut results in an unambiguous loss. For the average family, publicly provided health care is cheaper, more efficient and more effective than private. It only takes comparing the US health system to publicly funded Western European ones to see this.

The public sector took less than half of total health expenditure in the US (48.6%), compared to an average of over three-quarters for the 15 European countries. In 2007 none of the 15 had a public sector share below 70% and their life expectancy was higher in correlation.

Life expectancy at birth in the US in 2012 was 78.7 years. This is more than two and a half years less than the average for 15 Western European countries and more than four years less than in Italy (the country with the highest at 82.9). UK life expectancy in 2012 was almost three years more than in the US, with a public sector share of expenditure over 80%.

Every other important health indicator conveys the same message: that private sector provision in the US is bad for the health of its citizens. For example, infant mortality is 6.1 per 1000 births in the US, lower than only two of the 28 member countries of the European Union (Bulgaria and Romania).

Analogously, experience repeatedly demonstrates the inadequacy of private pensions. In addition to the problem of flagrant misrepresentation by sellers of “pension products”, a survey of UK residents aged 16-64 found that less than half of those questioned had sufficient understanding of options to make an informed decision.

This survey result should not surprise us. Few people can assess the balance between returns and risk that is at the core of funding private pensions. Public sector pensions completely avoid this problem. For a given tax structure and spending commitments (without the chancellor’s cuts in services and taxes), the growth of public revenue depends on the growth of the economy – not market risk.

Unlike private companies, the public sector can take the long view and has neither management fees nor a profit rake-off on top of the administrative cost that both systems have. And public pensions, unlike private ones, are risk free.

The affordability argument

We frequently hear from politicians from both sides of the aisle about the “affordability argument”. This argument maintains that whatever the advantages or disadvantages of public provision, the government cannot “afford” what it is providing now, much less do more.

But this argument is obviously false. Take the superficially difficult case of pensions, which turns out to be quite simple. Reducing publicly provided pensions by whatever technique does not save money. Either it increases poverty and want among the elderly, or it shifts the cost of funding pensions from the public sector to individuals.

There is no saving, unless you believe that increased poverty has no cost. On the contrary, because the public sector is the more efficient provider, reducing government funding of pensions, health and education involves negative saving. It costs us money.

The private sector does a much better job than the public in producing and supplying many goods and services. Buy your car, your mobile phone, your pizza Napolitana from a private company or shop, because these and other goods and services are what businesses do well.

But leave it to the public sector to deliver on health, education and pensions, because it is the more efficient supplier. Cutting taxes is not a giveaway to hardworking people, it takes away from all but the top 1%, forcing people to seek more expensive ways to obtain what the public sector does well – or do without.

The prime minister’s promise of tax cuts is nothing other than a veiled promise to cut public provision and well-being. Far from longing for lower taxes, we should welcome taxation as a central ingredient for a prosperous society. As US justice of the Supreme Court, Oliver Wendell Holmes, wrote in 1924, “taxes are what we pay for civilised society”.