by Mike Denham, former chairman of the TaxPayers' Alliance
British taxpayers are struggling under a record tax burden. It’s been driven by a huge increase in public spending, which over the last quarter century has ballooned under both Labour and Conservative governments. The one constant trend over this period: much of it will have been wasted.
Since the turn of the millennium, public spending has increased from 35 per cent of GDP to over 45 per cent this year. That’s an increase of £280 billion in today’s terms, equivalent to 37 pence on the basic rate of income tax, or 30 percentage points on the standard rate of VAT. As a share of GDP, it’s also by far the biggest spending increase of any G7 country – around three times the average increase across the other six.
So, what have taxpayers got for all that extra spending? And how much is being wasted?
Part of the increase (around one seventh of the total) is additional debt interest, reflecting the fact that government debt has soared from around 30 per cent of GDP up to 100 per cent. Today’s taxpayers get absolutely no benefit from that – they are simply paying the bills run up by a succession of profligate governments who’ve been incapable of maintaining fiscal discipline.
The biggest increases have been in health and welfare spending, which together account for around half the total. And although taxpayers are at least getting something from that, given what we know about government inefficiency and waste, it’s highly unlikely that it represents value for money. For all the extra money poured into the NHS, it offers such shockingly poor service that even the Health Secretary describes it as broken.
In the twenty years since the TPA was founded we’ve examined hundreds of government programmes and rarely discovered one that operates efficiently in the interests of taxpayers. We’ve exposed waste totalling literally hundreds of billions.
And there are good reasons for expecting such inefficiency and waste to continue. Government operations are never subject to the same kind of competitive pressures that promote efficiency in the private sector. And because the government funds itself by imposing taxes rather than selling services to willing buyers, its activities are at best only loosely and indirectly linked to what its customers actually value.
Of course, all governments suffer from such weaknesses, but we can get some idea of how inefficient ours is by calibrating its performance against governments elsewhere. Because when it comes to efficiency, it turns out that our government falls well short of the best performers in comparable countries.
One of the leading experts in the field of comparative government efficiency is German economist Ludger Schuknecht, a veteran of senior roles at the OECD, European Central Bank, IMF, and the German Finance Ministry. Over the years he’s written and co-authored several books and papers on government spending and its results. His most recent comprehensive study looks at the situation in the decade before the covid pandemic (that is, before the emergency disruption to normal spending patterns).
His approach is to weigh the cost of government (what percentage of GDP it spends) against its output. Output is measured across seven broad categories of service that today’s taxpayers generally expect their governments to deliver. They range from economic performance to public infrastructure, to social objectives including education, health, and income distribution. To ensure cross-country consistency he focuses on established metrics constructed using standard methodologies (for example, for health performance he uses life expectancy and infant mortality).
We should note that his analysis focuses on final output at the whole country level, rather than just the elements that are directly supplied by the government. Institutional arrangements vary between countries, so that for example, healthcare may be supplied by a range of providers with a range of payment systems, rather than a monolithic tax-funded nationalised supplier like the NHS. The idea is that governments ought to pursue the most efficient system overall, rather than simply pour ever more taxpayers’ money into their own inefficient operations.
He examines 20 OECD member countries and identifies three broad groups: “small” government countries, where government spending is less than 40 per cent of GDP; “big” government countries where it is over 50 per cent; and “medium” government countries where spending is between 40 and 50 per cent. In those terms Britain has gone from being a small government country at the turn of the millennium to being a medium government country now.
His overall conclusions are striking:
- In terms of economic performance, “small” government countries tend to do much better than “big” government countries.
- In terms of social objectives (health and income distribution), “big” government countries tend to do better than “small” government countries.
- “Medium” government countries tend to do no better than “small” government countries in terms of social objectives, but much worse in terms of the economy. Perhaps surprisingly they also do worse than “big” government countries in both social objectives and the economy. They seem to deliver the worst of both worlds.
The fact that there’s a trade-off between economic success and spending on social objectives is hardly surprising. More social spending requires higher taxes, and higher taxes are always likely to hold back economic performance. It’s a critical issue, as the TPA has always argued.
Of course, that’s not to deny that different societies may decide to strike different balances between economic success and social objectives, but Schuknect’s analysis suggests the terms of the trade-off get worse as government size moves from “small” to “big”.
The analysis goes on to calculate an aggregate government output measure for each country, combining all the individual service metrics, including those for both economic and social performance. Aggregate output for each country can then be set against that country’s government spending percentage and national efficiency ratios calculated.
The results show a wide dispersion between countries. Switzerland, Canada, the USA, and Japan turn out to be among the most efficient at generating results from their government spending overall. At the other end, Portugal, Italy, Greece, and Spain turn out to be the least efficient.
And how does Britain stack up?
It turns out that while our government is not among the least efficient, neither is it close to the top performers. The analysis suggests that if Britain could match the performance of top performing Switzerland, then instead of the government spending 45 per per cent of our national income, it could produce the same aggregate level of service output on well under 35 per cent. In other words, we could achieve the same service output level as now, but with an annual fiscal saving of around £300 billion to fund massively lower taxes and government borrowing.
Now it’s true that Switzerland is a bit of an outlier in the analysis, so it’s probably more prudent to benchmark ourselves against the cluster of second tier performers – Canada, the USA, and Japan. If our government could match them for efficiency the analysis suggests it could maintain the same level of output as now, but at the lower cost of 38 or 39 per cent of GDP – an annual saving of £170 - £200 billion.
How much of our money does the government waste overall?
This international comparison suggests that inefficiency and waste in our government's operations are costing us up to £200 billion annually. And we should note that’s when we benchmark ourselves against other governments, which for the reasons mentioned earlier, almost certainly aren’t themselves operating at the true maximum efficiency frontier.