Decreasing the size of the state is very unpopular

I last talked about this question from the British Social Attitudes survey in 2014. Here is the latest version of this longstanding survey question (source and exact question here).

A point I made in the last post was that the percentage of people wanting lower taxes and less spending has always been less than 10%. If you believe the survey, and I see no reason not to, there has since 1983 been no public appetite for reducing government spending in order to cut taxes.

All the action over time is between those who want things to stay as they are, and those who want higher spending and taxes. As public spending has been cut in recent years, so the number of people wanting more spending and higher taxes has increased. However that proportion is still not up to the level it was in the 1990s.

Does this survey suggest that half the population want a larger state, and hardly anyone wants a smaller state? That depends on what you mean by the state. The question actually asks about spending on “health, education and social benefits”, so it seems reasonable that this is what people are responding to. They are taking as given that the government in the UK provides these things, and are simply expressing their view about whether they want more of these goods and are prepared to pay for them. The question does not ask about whether these goods should be produced by the state or by private contractors working for the state.

When the public are asked about who should own and run various activities, there is clear support for more rather than less public involvement. (Chart source.)

These numbers are from last year, so the collapse of Carillion and the problems with the East Coast rail line are likely to push public opinion even further away from the privatisation ideal. Note that only about 10% want privatisation of the NHS, which has continued rapidly under this government. A government that reduces government spending and taxes, and pushes privatisation of the NHS, seems like a government of the few and not the many.

I remember being told how nervous the last Labour government was when they decided to raise NIC rates to fund an increase in NHS spending. They had committed to not raising the basic rate of income tax in order (they thought) to be able to win elections. Given the data above, you might wonder why. But then I remembered how the Labour PLP had decided that they had lost the 2015 election by being too left wing, again without any real evidence. Perhaps the lesson of these two poll results is that the gap between what people actually want and the received wisdom of the Westminster bubble is very large.

But do the numbers add up?

The (official) launch of Labour’s manifesto saw mediamacro on display in all its unabashed pre-Keynesian ignorance. The idea that we could spend more on health and education by raising taxes on companies and high earners was so novel and (to many) attractive, the broadcast media collectively decided there had to be something wrong. The manifesto appeared to have increases in current spending exactly covered by increases in taxes, so surely there had to be some mistake.

Step forward the Institute of Fiscal Studies (IFS). Now I have huge respect for the IFS and the way it is run. Over the years it has established itself as the organisation of choice from where the media can get unbiased assessments of the size of individual fiscal measures or fiscal packages like budgets and election manifestos. But with this influence comes responsibility. Paul Johnson will freely admit that the IFS does not do macroeconomics. For many years before 2008 the IFS could get away with that, but no longer.

The IFS quite rightly said that tax estimates were uncertain because people can take measures to avoid tax increases or new taxes. The manifesto had made an allowance for this, but presumably the IFS thought it was not enough. In the media framing of measures having to ‘add up’ that suggested a potential problem with Labour’s figures. What the IFS did not say (or at least were not reported as saying) is that - when interest rates are at their lower bound - a tax funded spending increase would provide a much needed boost to activity, which itself would raise taxes. This is the famous balanced budget multiplier, which still holds in state of the art New Keynesian models when rates are stuck at their lower bound.

The IFS said raising corporation tax would cut investment, but did not note that raising demand would have the opposite effect. Because the IFS does not do macro, these points were simply not made. No one made the point that increasing public investment when real interest rates were about zero not only made good economic sense, but would also boost the economy, probably raise productivity, and itself bring in more taxes. In other words the IFS were implicitly assuming that this package would have no impact on output. [1] When interest rates are at their lower bound that is highly unlikely to be true. Even if interest rates did rise to exactly offset the demand impact of the balanced budget expansion, the increase in public investment will have positive supply side effects. I’m afraid this is a case where not doing macro means that what the IFS says is hopelessly one-sided. It has been 7 years since 2010, which is surely time enough to learn a bit of macro.

But this was nothing compared to media incredulity over failing to ‘cost’ the various nationalisation measures. Again the media have had years of being told that privatisation saves the government money, so surely reversing privatisations must cost them money. Of course neither is true in a macro sense. As any business will tell you, if you borrow to buy an asset, you get a return which should pay for the borrowing. When the government has no problem selling its debt at around zero real interest, the question ‘how much will it cost’ is completely irrelevant. The issue is whether this industry should be a private monopoly or state owned.

I should record two caveats to this familiar complaint about mediamacro in the coverage I saw. First, the BBC’s economics editor Kamal Ahmed did give a 30 second slot to someone from the IPPR, who very succinctly made the macroeconomics case for both a balanced budget spending increase and additional public investment. It was a single ray of sunshine in an otherwise dreary day. Second, senior Labour politicians still seem unable to robustly defend their own position on this. You don’t respond to questions about why nationalisations have not been costed by saying you do not know what the share price will be. You say as long as we pay a fair price it does not matter what it costs, because the state is buying an asset that brings a return that more than pays for the borrowing.

Of course journalists should ask hard questions at a time like this. I just wish they would not persist with questions which show their own macroeconomic ignorance. (It is a problem that arises with Budgets just as much as with election manifestos.) As any macroeconomist knows, there is no reason why the numbers have to add up, and if they didn’t on this occasion that is actually a benefit given rates are at their lower bound. The media’s focus on adding up misinforms viewers, and is classic mediamacro. As any economist knows if this government buys an asset by borrowing at zero real interest rates it really does not matter how much you have to borrow. Ask Labour politicians why they think the industry would be more efficiently run under public ownership, not how much will it cost.

But let me end on a positive note. It is great to finally have at least one of the two main parties putting the case for a large increase in public investment when the government’s borrowing costs are so low. It is great to see one party prepared to raise taxes to stop the growing squeeze on the NHS and the new squeeze on education. It is great that Labour have a fiscal rule which tries to represent current macroeconomic understanding rather than the wisdom of the Swabian housewife. Let’s hope this lasts beyond this election.

[1] In principle that could influence the ‘highest tax take since 1940s' line, but the impact on GDP would have to be quite large to do that. (HT GT)