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Archive for October 20th, 2010

I want to believe. No, I’m not talking about the X-Files movie from 2008. I’m referring to the BBC’s report that the U.K. government will cut spending and eliminate 500,000 government positions. Unfortunately, I can’t accept this story at face value. As I’ve noted before, the United Kingdom has the same dishonest fiscal system we have in America, where politicians claim they are cutting spending when spending actually in increasing. They get away with this scam by comparing how much spending is growing to an imaginary baseline showing even faster growth. So while I hope this story is true, I won’t be surprised if the number of bureaucrats in 2015 is not substantially different than it is today.

Chancellor George Osborne has unveiled the biggest UK spending cuts since World War II, with welfare, councils and police budgets all hit. The pension age will rise sooner than expected, some incapacity benefits will be time limited and other money clawed back through changes to tax credits and housing benefit. A new bank levy will also be brought in – with full details due on Thursday. …shadow chancellor Alan Johnson, for Labour, called the review a “reckless gamble with people’s livelihoods” which risked “stifling the fragile recovery” – a message echoed by the SNP, despite smaller than expected cuts in Scotland. Mr Osborne ended his hour-long Commons statement by claiming the 19% average cuts to departmental budgets were less severe than expected… Up to 500,000 public sector jobs could go by 2014-15 as a result of the cuts programme, according to the Office for Budgetary Responsibility. …Labour would also have had to make major cuts if they had won the general election, but the party insists Mr Osborne’s plans were too aggressive and risked tipping the country into a “double dip” recession. During raucous Commons exchanges, shadow chancellor Alan Johnson accused Tory backbenchers of cheering “the deepest cuts to public spending in living memory”.

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Governor Mitch Daniels of Indiana has triggered a spat among policy wonks with his recent comments expressing sympathy for a value-added tax (VAT). Kevin Williamson of National Review is arguing that a VAT will probably be necessary because there is no hope of restraining spending. Ryan Ellis of Americans for Tax Reform jumped on Williamson for his “apostasy,” arguing that a VAT would be bad news for taxpayers. From a policy perspective, I’m very much against a VAT because it will finance bigger government, as explained in this video.

That being said, Kevin Williamson makes a good point when he says that some supply-siders have neglected the spending side of the fiscal ledger. And it certainly is true that Republicans don’t seem very interested in curtailing the growth of government. But does this mean, as Williamson argues, but that our choices are limited to 1) a 36 percent spending cut, 2) catastrophic deficits and debt, or 3) a European-style value-added tax.

I actually think it would be a great idea to reduce the budget by 36 percent. That would bring the burden of federal spending back down to where it was in 2003. Notwithstanding the screams from various interest groups that this would generate, nobody was starving in the streets when the budget was $2.3 trillion rather than today’s $3.5 trillion. But Kevin is unfortunately correct in noting that this type of fiscal reform won’t happen.

Kevin is wrong, however, in saying that we therefore have to choose between either Greek-style deficits or a VAT. According to the Congressional Budget Office, tax revenues over the next 10 years will increase by an average of about 7.3 percent each year – and that’s assuming the tax cuts are made permanent and the AMT is adjusted for inflation. Reducing red ink simply requires that politicians exercise a tiny bit of restraint so that spending grows by a lesser amount. This video walks through the numbers and shows how quickly the budget could be balanced with varying levels of spending discipline.

By the way, it’s worth pointing out that the VAT has not prevented gigantic deficits in nations such as Greece, Japan, Ireland, Spain, England, etc, etc. Politicians in those nations implemented VATs, usually with promises that the money would be used to reduce other taxes and/or lower red ink, but all that happened was more spending and bigger government (this cartoon makes the point in a rather amusing fashion). In other words, Milton Friedman was right when he wrote that, “In the long run government will spend whatever the tax system will raise, plus as much more as it can get away with.”

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