Sunday, November 28, 2004
PUBLIC SECTOR HOLDS BACK ECONOMIC GROWTH
If, for the next century we grow at 2% (ie 1.02 to the power 100) our standard of living will increase (no I'm not going to tell you try it) times
If for the next century we grow at an average of 8% (ie 1.08 to the power 100) our standard of living will increase (try it) times.
Reform has published a new report, Costing Britain – falling productivity in the public sector, showing that the twin cost of poor public sector performance and a rising tax burden will reduce British living standards over the long-term. The report presents the evidence of falling productivity in the public sector and shows how this poor performance damages economic growth. The report suggests that the cost of poor public sector performance and rising taxes will amount to £6,000 a year foregone per person, or £14,400 per family, in 25 years’ time.
Click here (pdf, 320kb) to download the report. It finds that:
§ The UK public sector is undergoing a period of dramatic expansion. Between 1999-00 and 2007-08, public spending will increase by 40 per cent in real terms. By 2008-09, the tax burden is projected to reach its highest level for 24 years. Since 1998, the number of public sector jobs has increased three times as quickly as those in the private sector.
§ But these huge increases in resources have been committed without a robust measure of value for money. The evidence overwhelmingly suggests that public sector productivity performance is not only below the level of the private sector but actually falling in absolute terms.
§ Tax-and-spend policies have a twin negative impact on economic growth: the public sector achieves poor outputs and higher taxation reduces incentives to work. Conversely, reducing taxation and increasing public sector productivity growth, through public sector reform based on choice, competition and accountability, would have a dynamic positive impact on growth and living standards.
§ Unless policy is changed to improve public sector productivity and reduce the tax burden, the long-term cost to the economy will be immense.
§ On current policy, with zero public sector productivity growth (a generous assumption) and a rising tax burden, trend economic growth will fall to approximately 2.55 per cent per annum. If the UK were to average 2.55 per cent per annum real growth over the next 25 years, income per head would rise to £33,100 per annum in today’s prices.
§ But with an improvement in public sector productivity growth up to the current trend rate of the whole economy, and a reduction in the tax burden to the level of 1996-97, trend growth would rise to approximately 3.25 per cent per annum. If the UK were to average 3.25 per annum real growth over the next 25 years, income per head would rise to £39,100 per annum.
§ Therefore an improvement in public sector productivity growth and a reduction in the tax burden would mean an increase in incomes of £6,000 per capita, or £14,400 per household, per annum in 25 years’ time.
Commenting on the poll and the report Reform’s Director, Nick Herbert, said:
“Taxpayers are getting poor value from public spending increases. They are rightly concerned about waste and they are receptive to arguments that Britain needs lower taxes to remain competitive and raise living standards. But while the political parties continue to make spending commitments, and since none are making clear pledges to reduce taxation, it is not surprising that voters conclude that taxes will rise after the next election.”