Paul Ormerod: Tax cuts, public spending and morality

Kier Starmer, the Director of Public Prosecutions, has vowed to ‘ramp up’ prosecutions against individuals for tax evasion five-fold in two years. He has made clear his plan to target middle-class earners, citing as examples ‘lawyers, tax consultants and plumbers’, an intriguing perspective on the British class system, or perhaps we are all middle-class now.

It is of course wholly right and proper that people pay the amount of tax required by law. As Mr Starmer points out, evasion is not a victimless crime. Law abiding citizens are required to make up the shortfall. His estimate that this amounts to £769 per household has an accuracy about it which recalls Gordon Brown’s days at the Treasury. No doubt the former Prime Minister would have added the correct number of pence as well. But whatever the exact number, it is clearly non-trivial.

Mr Starmer goes on to argue that ‘This is money that could have been spent on schools, hospitals, fire-fighters, police and public services’. There seems to be something missing from this list. It could be used, not to increase public spending, but to finance tax cuts for the vast majority of people who pay their correct amounts.

For example, total receipts from VAT are currently running at an annual rate of about £85 billion. The tax shortfall due to illegal evasion is estimated to be £14 billion. So the money could be used to reverse George Osborn’s January 2011 increase in the standard rate from 17.5 to 20 per cent. And there would still be a bit left over. With many retailers struggling, a VAT cut would be very welcome news.

Brown’s long tenure as Chancellor and Prime Minister has brutally exposed the myth that spending more on public services necessarily leads to an improvement in those services. Not least of the reasons is that much of the huge increase in spending under Brown was expropriated by public sector employees to boost their salaries and pensions. Far from providing better public services, the monies were simply used to subsidise the private consumption of those employed in the public sector.

The shambles at the BBC epitomises the problem. The wretched George Entwistle on his £450,000 a year was merely the tip of the iceberg. The organisation chart for senior management appeared in the press at the time of his resignation. Large numbers of people are paid huge six figure salaries, holding job titles which appear to have no meaning in everyday English.

Perhaps the most depressing aspect of the current debate in political economy on austerity is the way in which the Left has slid effortlessly into the most conservative stance imaginable. Despite overwhelming evidence to the contrary, every single penny of public spending is deemed not only worthwhile but sacrosanct.

The impact of excessive public spending on an economy can be devastating. We can see the effects in countries like Greece and Spain, which lived for years far beyond their means. There is a moral case for holding it in check.

Paul Ormerod is an economist at Volterra Partners LLP, a director of the think-tank Synthesis and author of Positive Linking: How Networks Can Revolutionise the World