The media assure us that state spending is good for growth. Spending is assumed to be mainly for health, education and pensions, which people are deemed unable to arrange for themselves.
The media assure us that state spending is good for growth. Spending is assumed to be mainly for health, education and pensions, which people are deemed unable to arrange for themselves. None of this is true. If Britain had dumped the state fifty years ago, including the planning system, we would be more than twice as prosperous.
Recent posts have explained how prosperity is the automatic outcome of unfettered voluntary cooperation in a free society operating under laws based on the libertarian Non-Aggression Principle (NAP). Today’s post shows how a hypothetical libertarian Britain would be much better off compared to today’s demoralized, severely parasitised country.
State intervention offends against the NAP by attacking or threatening to attack productive people or their justly acquired property. The state uses force to steal taxes. It coerces, or bullies, people into accepting value-destroying lose-win arrangements with the state’s officials or cronies. Not infrequently it foists lose-lose arrangements with other bullied victims on the citizenry. The result is material impoverishment, but how much? Can we work out how much damage the state does to living standards? How much better off might we be without it?
A number of approaches spring to mind. You can look at the benefit of paying no taxes whatsoever. There would also be much cheaper housing without the state. Academic studies demonstrate that increases in government spending actually harm economic growth. And there is historical evidence of very free market societies like Hong Kong overtaking Democratic Socialist laggards like 20th Century Britain.
This is a discussion of what Britain might be like 50 years into a period of being a libertarian society. This post is not a discussion about how a smooth transition to such a society might be arranged now. There is no easy way out of the current predicament. The impending fall of Democratic Socialism cannot be blamed on libertarianism.
Absolutely no Taxation
First to taxation. This year the Government expected to spend about £850,000,000,000 before it screwed up so badly over the corona virus fiasco. It’s easier to describe this spending as £850 billion or even £0.85 trillion. It is equivalent to just under 40% of Gross Domestic Product (GDP) which is a common measure of the size of the economy. Total GDP was expected to be around £2.2 trillion. This deeply flawed figure is the state’s view of Britain’s total production and therefore income. It assumes government expenditure is all productive and equally so with private sector production. In fact, state expenditure is a mixture of the damaging, the useless and the somewhat useful but expensive. UK private sector production was expected to be £1.35 trillion. The state’s debt was around £1.8 trillion which is around 120% of the rather smaller private sector.
First of all, a brief word about the corona virus outbreak. All the failures of monopolistic state central planning incompetence have been on clear display. The state decided that a virus which only affects those with serious pre-existing medical conditions, and overwhelmingly people over 60, decided to close down the economy which is largely staffed by healthy people under 60. The ensuing lockdown has been a medical failure which seems if anything to have made things worse compered to no lockdown societies like Sweden or some US states. See my post May 14th ‘Update on the Fake Pandemic’.
On the fiscal front, government spending has been given a decisive push upwards while the economy and tax base has been badly impaired. State debt is expected to increase by £300bn (£0.3 trillion) this year to about the same size as GDP. That may well be optimistic. State debt would then be about 150% of total marketable (i.e. private sector) production.
Back to tax as it was assumed to work before the corona virus. People grossly underestimate what the state costs them. The Taxpayers Alliance estimates that people on average pay around 40% of their income in tax once you include all direct and indirect levies. This must be more or less the case if the state takes roughly 40% of the cake. If you are in the upper range of incomes in the productive sector then the state is bound to be helping itself to rather more than half of what you produce. Here is the thing. In a free society there would be no taxes of any kind.
Calculation 1: Standard of living improvement from dumping a wholly useless state
Let’s pretend – initially at least - that all government spending is a total waste. This is not an unreasonable assumption for most third world states. If such a state vanished then productive people would achieve a one-off increase in purchasing power caused by the return of all the direct and indirect tax embedded in what they do and buy.
We can make a rough calculation of the benefits – probably in the form of sharply lower prices – of jettisoning the state for a roughly average earner of £30,000 per annum and paying their average 40% of income in all direct and indirect taxes. We can also consider a higher rate earner who we assume loses 50% (it is probably an underestimate) of his standard of living to tax.
Without the state, the first individual on £30,000 would instantly be around 2/3rds better off. The calculation would be as follows. Their current real post tax standard of living is £18,000. This is £30,000 less a 40% tax take. The gain from going to an unimpaired income of £30,000 from £18,000 is £30,000 divided by £18,000. This is 1.667, which is a two-thirds increase.
The second individual on £60,000 would instantly be twice as well off. The calculation would be as follows. Current real post tax standard of living is £30,000. This is £60,000 after a 50% overall tax take has been deducted. The gain from going to an unimpaired income of £60,000 from £30,000 is a doubling in his living standards.
Calculation 2: Standard of living improvement from dumping a partly useless state
However, the assumption used above that the state is entirely useless should be relaxed somewhat in favour of first world governments. The aim is to work out how much on average people would pay to private providers for services now provided by the state out of its total spending of £850 billion this year.
I assume most people would consider education and health to be necessary. They are however twice as expensive as they need be. Both are cost push monopolies riddled with Spanish customs. Health in America and Britain costs two to four times the share of GDP it used to cost three generations ago. (See post on April 30th ‘What about Healthcare in a Libertarian Society’.) UK State Education some time ago was already spending £10,000 per pupil, excluding university students. In an age of nearly free on-line learning this is very high. Between them they could cost £125 billion, i.e. half the £250 billion the UK government expected to spend on them in 2020.
Let’s generously throw in £75 billion for all other government functions that might be of some value and would need to be provided by independent providers, say defence, justice and transport, plus a contingency amount. That amounts to £200 billion of former state spending that would be met privately in a free society. That is less than a quarter of forecast 2020 state spending of £850 billion (23.5%, but let’s say 25% for ease of calculation).
I have excluded the forecast £160 billion spending on state pensions from the £200 billion. I do not expect them, or most private pensions, to pay out once Democratic Socialist regimes have trashed their debt, currencies and much of their tax bases in the next couple of years. That is what happened when the ex-Soviet Union suddenly fell apart.
Instead people would save for themselves. I make a steady state assumption that every household in future will save 10% of income for the forty or more years of a breadwinner’s working life. After 40 years at a 5% average rate of return with no tax or inflation, an average earner would have £350,000 in the bank and an annual return on investments, if they begin to take it on retirement, of £18,000. Furthermore, it is likely that the purchasing price of money in a free society would have increased over a forty-year period. There would be no death duties and so many families could accumulate large nest eggs over generations.
Note too that there would be no welfare provision. In a stable and prosperous employment market there is no place for able bodied welfare payments. There would be no welfare or criminal underclass (especially since there would be no illegal drugs). People’s savings, and Friendly Society or insurance arrangements would generally be ample for the able bodied. Severely disabled people would be helped by the charitable efforts to be expected in a rich and civilised free country.
One can now calculate the revised improvement in purchasing power from assuming that just under a quarter of the amount formerly paid in tax must now be spent on private provision of ex-government services, and that 10% of income must be saved:
For the average earner of £30,000, current post tax purchasing power is £18,000.
Getting rid of tax increases purchasing power by returning today’s average 40% tax loss of £12,000 to get back to £30,000. But from this sum there must now be deducted 10% for annual savings and 10% for payments to private providers for the equivalents of education, health, defence, justice etc. So, the £30,000 goes down by £6,000 or 20% (10% savings and 10% to services). The new post tax and savings income is £24,000 (£30,000 less £6,000). The improvement in their standard of living would thus be to £24,000 from £18,000 at the moment. The earner’s net purchasing power would be up by £24,000 divided by £18,000 which is 1.33 or a one third improvement.
For the higher earner of £60,000, current post tax purchasing power is £30,000. Getting rid of taxation restores purchasing power by returning today’s average 50% tax loss of £30,000 to get back to £60,000. But from this sum there must now be deducted 10% for annual savings and 12.5% (a quarter of the previous 50% tax take) for payments to private providers for the equivalents of state education, health, defence, justice etc. So, the £60,000 goes down by 22.5% (10% saving and 12.5% for privatised services). The new post tax and savings income is therefore £46,500 (£60,000 less £13,500). The improvement in the higher earner’s standard of living would thus be to £46,500 versus £30,000 at the moment. The earner’s net purchasing power would be up by £46,500 divided by £30,000. This is 1.55 or over a 50% improvement.
Please note that I am taking no account of many other benefits of having dumped the state. Privately provided services would be better than their state funded equivalents today. The confidence, resilience and independent spirit of society of savers would be remarkable. Lastly, many new activities that cannot prosper now because of the high taxation costs would grow and add further to prosperity.
PS: Editor’s note.
Let me just run over my claims about state spending in a bit more detail. I suggest above that a substantial increase in well being would arise from having dumped the UK Government at some point in the past. How? Ask people around you what they think is the government’s responsibility to provide in terms of services. They will likely say the NHS, Education, Old Age Pensions, Defence, and Transport. These items account for £162bn, £92bn, £161bn and - Defence and Transport together - £85bn of planned state spending. Together these items total £500bn. Since total spending was planned to be £850bn (before the virus fiasco) that leaves £350bn of state spending for who knows what? (There is a relatively tiny amount spent on policing and justice.)
Then I start on these core state services. All I am saying is that health and education could likely be provided by independent providers for half the cost, because they used to be. And because uncompetitive unionised state monopolies riddled with cost-push pressures and Spanish customs are always expensive. There is plenty of scope for improvement in defence and transport but I leave them more or less unscathed at £75bn in my estimated costs of private sector alternatives. Pensions, and to some extent unemployment and welfare, are addressed by making saving worthwhile again and by the fact of a free society having a buoyant and stable jobs market due to the absence of state intervention.
Housing costs would fall back by at least half without the state I have made rough but I hope reasonable assumptions about our losses due to taxation, and about the scope for depending on saving in sound money. Now I will make some more about housing.
The state has driven housing costs up massively (see ‘Better Housing after the Fall’ May 24th). To keep the story short, rental housing costs are now around 30% of income. It seems they were 10% - 15% in 1980. House owners are loaded with mortgage debt and paying around 20% of income on average. This is all much harder for younger and poorer people who would be disproportionately better off in a low housing cost society that had dumped the state.
I propose to rework the examples above to include a halving of rental costs from 30% to 15% for the average renter, and a halving of mortgage debt loads from 20% to 10% for our higher earner.
For the average earner at the £30,000 level, their real net purchasing power increases from £24,000 to £28,500 because we add back a rent saving of 15% of income, which is equivalent to another £4,500. The total increase in spending power stemming from having dumped the state and its inflated housing costs rises from the current £18,000 to £28,500. This is an increase of nearly 60%.
For the higher earner at the £60,000 level, their real net purchasing power increases from £46,500 to £52,500 because we add back a mortgage saving of 10% of income, which is equivalent to another £6,000. The total increase in spending power stemming from having dumped the state and its inflated housing costs rises from the current £30,000 to £52,500. This is an increase of nearly 75% or three quarters.
Increased government spending cuts economic growth
Just totting up static savings from eliminating taxation and inflated housing costs has brought us close to a doubling of standard of living attributable to having dumped the state’s taxation and housing scams.
But there is more evidence on the dynamic effects – effects over time - of shutting down the state. Every year of a free society would be another year of progress. The cumulative effects of eliminating the deadweight of the state would grow over time.
Many studies have shown that an increase in government expenditure – especially on its own activities rather than transfer payments such as pensions and unemployment benefits – results in a fall in economic output. On the face of it this is surprising. Firstly, people are routinely assured by the MSM that government spending stimulates growth, when in fact there is evidence that it does not. Secondly state spending, however incompetent, is still assumed by economists to add to economic output and therefore shows as short-term growth in the GDP figures. Evidently increasing state interference, with its waste, featherbedding and encouragement of bad attitudes and resentment, is pretty poisonous.
One study compared historic changes in state spending as a share of the national economy with reported economic growth in subsequent years. The study suggested that every ten percentage points fall in the state’s share of GDP increased subsequent economic growth by between 0.3% and 1% per annum. By the way, these studies assume that the government is necessary to run justice – which is historically inaccurate – but the strong implication is still that state spending above the 10% - 20% range is clearly damaging.
I am a bit sceptical of the higher estimates for growth foregone, say 1% per annum or more per 10% fall in state share of GDP. After all advanced economies usually achieved no more than 2%-3% growth before the current crisis. I wonder if governments which cut spending also tend to cut regulation too. That would reinforce the initial growth spurt triggered by shifting resources from coercion (the state) to cooperation (us).
Progress through innovation is necessarily much slower than the catch-up growth societies like Japan and China have achieved in the past by copying established western technologies.
I am not going to suggest that taking the UK government’s expenditure down from 40% to nothing would have raised Britain’s growth rate by 4% per annum. But it would be reasonable, and indeed highly conservative, to adopt the lowest estimate of increased growth (0.3% p.a.) attributed to a 10% fall in spending. We could assume that dumping the state fifty years ago could have increased annual economic growth by 1.2% since then (i.e. 4 times 10% times 0.3% growth). Had such apparently modestly greater growth occurred in Britain over the last 50 years, the standard of living would now be 80% higher than it is.
The 80% extra improvement in living standards over the last 50 years can be combined with the 60% - 75% improvements from eliminating taxation and state inflated housing costs which we identified above. The result is a rough but robust calculation that real purchasing power living standards could have been as much as three times higher in this country than they are, if we had become a stateless society two generations ago.
The cumulative damage caused by the Democratic State is surprisingly great
I realise that many people will be surprised by this analysis. Could a country that had dumped the Democratic State earlier on, or never developed it, be so much better off? Yes. Government subsidised and mandated scams, cost-plus cushy state employee salary and pension deals, restrictive rules in housing, and economically pointless spending, is a huge load on the working population. Dumping the state is a huge win for productive people.
I welcome comments on, and challenges to, this post at firstname.lastname@example.org.