CPS says small is best for boosting economic growth

Small is best. That’s the finding from an economic research paper published today by the Centre for Policy Studies (CPS) which looks at the economic performance of advanced economies with big governments and compares it to the performance of those with small governments. Their conclusions might be nothing new, but it’s certainly helpful to have a new paper to add to the mountains of evidence all pointing in the same way on the question of whether our government is spending too much of our money.

The 2020 Tax Commission published ‘The Single Income Tax’ on Monday, which includes a review of the literature on the effect of the size of government on economic growth. It also recommends reducing to 33 per cent of the nation’s wealth the proportion of national income that the Government spends. Despite all the evidence, Nick Pearce of the IPPR and others still cling to a delusion that “the empirical evidence doesn’t support” the inverse correlation.

Ryan Bourne and Thomas Oechsle have updated the evidence in their CPS paper, incorporating the last 10 years of data and new countries such as Estonia. The numbers in their updated report using robust regression analysis confirms the story from the existing literature: a 10 percentage point cut in the government’s share of GDP per capita adds around 1.1 per cent to per capita economic growth figures every year. Over many years, that adds up to a lot.

The CPS’s estimate of the correlation is on the conservative end of the spectrum. But what if the CPS estimate was applied to the 2020 Tax Commission’s recommendation for government spending at 33 per cent of national income? If you started at 1965, by 2009 GDP would have been 43 per cent higher. That means instead of being £22,190 per person, it would have been £31,817.

But not only would individuals and families have been a lot better off with both much larger earnings and much lower taxes, our proposals would have meant a lot more money for the public sector, too. Even though government spending ballooned to £601 billion or 47.6 per cent of GDP in 2009-10, under 2020 Tax Commission proposals it would have been £604 billion. A smaller fraction of a bigger pie would have meant a bigger slice for the public sector.

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