The Cost of Government Crisis

Government Spending Must be Cut

In response to the state-induced cost of living crisis, there have been prominent calls to cut the rate of various taxes that the state imposes upon its working citizenry. One such area where this has been most pronounced in the UK is the rising cost of petrol, in which fuel duty and VAT can amount to up to 40% of the price paid at the pumps.

Prominent in this regard has been Conservative MP John Redwood, whose Twitter account pretty much reiterates the same, daily message like a long playing record:

However, while cutting taxes is always welcome, it will be next to useless in improving economic conditions unless it is accompanied – or even led by – another, very critical step: making drastic cuts to government spending.

Economic prosperity is dependent upon a system of private property, free exchange, market prices and profit and loss. Through these mechanisms, individual people direct scarce resources to where they can produce the most value. Over time, this leads to the production of more goods and services at increasingly lower prices. The more that the government interferes with this system – and the greater the number of resources it siphons off to its own favoured projects and boondoggles – then the less there is left over to devote to what we actually value the most.

Taxes are only one method of funding the state’s profligate waste. Governments can also resort to borrowing and inflation, and usually have little difficulty in doing so as long as they are prepared to put up with widening budget deficits. Indeed, in the past, it has been quite possible for “conservative” governments to cut taxes while also increasing the size of the state’s stranglehold over the economy. Thus the fact that tax cuts will mean that people get to keep more of their paper money will do little good if the state will simply borrow and print more to make up for their shortfall. The loss will just be felt elsewhere in the form of higher prices for fewer goods and services.

As a follower of the “Austrian” School of Economics, I believe statistical measurements such as GDP are highly flawed. Nevertheless, they can, at least, convey a general message over time.

As we can see from this chart, government spending as a percentage of GDP has been in a broad uptrend since the 1990s, with a sharp increase in the last few years. The same is true also of government debt as a percentage GDP, now approaching an eye-watering 100%. And yet GDP per capita has been largely stagnant since the late 2008 financial crisis, experiencing a sharp drop with COVID lockdowns in 2020.

The correlation is therefore clear: increases in government spending are retarding our economic prosperity. If we really want to solve the cost of living crisis, we need to shrink government’s slice of the economic pie as much as possible. Cutting taxes will do nothing unless and until this is addressed.