Spend, spend, spend...

It seems a while since I last wrote about the Liberal Democrats. Yesterday the party launched what it calls a "pre-manifesto". The document is entitled Freedom Fairness and Trust, thereby helpfully distinguishing the Liberal Democrats from the advocates of Slavery, Injustice and Treachery. What it says is predictable enough, but what it represents is quite interesting.

A few weeks ago, I wrote a column (which I was pleased that the Liberal Democrat reformers, going by the name of 'Liberal Future', reproduced on their web site - for it was partly addressed to them) arguing that while the Liberal Democrats had become a more serious political force in important areas of policy, that progress had been founded on a narrow base:

Charles Kennedy has unquestionably done much to enhance his party’s claims to be taken seriously. He has rectified the most glaring deficiency, a weak Treasury team expounding an incredible economic programme, by appointing the former Shell chief economist Vincent Cable to the brief, with David Laws as his deputy. The most obvious change that Cable has brought to the party’s official policy has been to wean it off a corporatism that could have been fashioned in the 1970s — “the begging-bowl culture of an industrial, or agricultural, welfare state”, as he has described it.

But the difference between Cable’s economic liberalism and his colleagues’ instinctive populism runs much deeper. Under Cable’s immediate predecessors, Malcolm Bruce and Matthew Taylor, the party condemned the Government’s fiscal stance of the late 1990s — when the economy was several years into its post-ERM expansion — as “fiscal flagellation”, identifying a supposed “windfall of the extra funds” that it urged the Chancellor to spend. The old approach is still deeply embedded in party thinking.

Just how embedded is obvious from reading the manifesto. According to The Guardian, it was written by Matthew Taylor, the former Treasury spokesman demoted a year ago to what I had mistakenly assumed was a sinecure. There are among senior Liberal Democrat parliamentarians, and specifically the Treasury team, some creative political thinkers; there is no trace of their influence in the manifesto that has just been issued in their name. As a programme of taxing and spending, it has two flaws: the policy on tax and the policy on spending.

The Liberal Democrats plan to spend taxpayer receipts in order to reward the affluent. There can be no other plausible interpretation of their plan to guarantee free personal care and abolish tuition fees. The party stresses the progressive character of their tax plans without acknowledging that the net effect of that tax and spending will be regressive if the service in question is used proportionately more by the better-off. (Julian Le Grand made this point in 1982 in his book The Strategy of Equality - eventually even the Labour Party, which was not noted for critical thinking at that time, caught up with his findings.) Tax funding of university education is regressive and inefficient. On personal care, the fact is that many people don't use it, but for those who do, it's an expensive service used for, on average (as compared with pension provision), a short period. This is a prime case for a system of social insurance (not primarily private insurance - there's too little information for it to be an efficient market), as happens in Germany. What would happen under the Lib Dem plan of providing free long-term care paid for by general taxation is reasonably easy to predict. Costs will escalate rapidly in real terms, taxpayer discontent will force the introduction of extensive means-testing, and in the meantime a generation of pensioners will have failed to make private insurance arrangements for themselves because they assumed the state would provide for them. I say it's predictable, because it's already happened that way when free care has been introduced - in the Netherlands and more recently Japan.

The reactionary character of Liberal Democrat policy is evidenced by the party's plans on tax, as reported in The Guardian:

Mr Taylor said the party would not increase corporation tax, and also had no "arbitrary figure" for what public spending should be as an overall percentage of GDP. He said a 50p top rate of income tax on those earning over £100,000 would only affect 1% of voters, yet raise £4.7bn.

There's no obvious economic reason that a rise in marginal tax rates of this order would have a serious disincentive effect, but there's a strong political argument against it. It goes against the trend of economic policy-making in the last two decades of simplifying direct tax rates while curtailing tax breaks - a process that in principle constrains the lobbying power of sectional interests. Moreover, it targets - by design; that's the point of it - a numerically small group, with whom most voters do not identify (e.g. corporate lawyers, investment bankers) but who have considerable financial expertise. The £4.7 billion figure that Taylor quotes takes no account of the likely efforts of this constituency to minimise the rise in its tax burden; that's a serious potential problem if you're relying on a narrow base of taxpayers.

This is a poor and unreflective document, and I can only assume from its character and authorship that it is not universally welcomed among the party's more thoughtful figures. My own view is that the party must split sooner or later, and that the more intense its efforts to be taken seriously - as it doesn't deserve to be on this evidence - the greater will be the likelihood of internal ructions.