The state of Britain and the size of it

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IvanV
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The state of Britain and the size of it

Post by IvanV » Mon Nov 14, 2022 2:08 pm

I thought this week's Bagehot column in the Economist is worth a look. It steps back from the short term debate over the immediate way to fill the £50bn hole in the budget, but rather considers what I consider the key strategic question for public policy in Britain: the size of the state, the quality of public services, and the taxes you have to pay to get what people expect.

It echoes the observation we often make here that taxes aren't high enough for a decent quality of welfare state. It adds the observation that they are high enough to give people the expectation of a decent quality of welfare state. Recent graduates, with their student loan repayments, are paying Scandinavian levels of tax and getting US southern state levels of public service.

Perhaps I'm just a sucker falling for a article that happens to echo so closely what I think.
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Re: The state of Britain and the size of it

Post by Woodchopper » Mon Nov 14, 2022 2:27 pm

An easier to read version of the article.
Although forever associated with the term, William Beveridge never liked the phrase “welfare state”. The man who 80 years ago this month published the blueprint for Britain’s post-war welfare state thought it conjured up an image of a “brave new world”, rather than the culmination of 50 years of reform by Conservative, Liberal and, eventually, Labour politicians. Newspaper cartoonists ignored his objections. One turned a besuited Beveridge into a steaming mug being toasted by a British soldier in 1942: “Here’s to the brave new world!”

A plan to combat the five giants of want, ignorance, squalor, idleness and disease was the defining political quest of the first half of the 20th century. It replaced a rather 19th-century idea of a “night-watchman state”, where the government saw its role as offering physical security and not much more. Skip forward eight decades and Britain has ended up with the worst of both worlds. Britain is a libertarian’s nightmare, with the state expanding to 45% of gdp; the tax burden is likely to creep towards levels not seen since Clement Attlee, the Labour prime minister who put Beveridge’s plan into practice. Yet it also manages to be a social democrat horror show, achieving little despite its vast size.

Increasingly the Conservative government provides a welfare state in name, but a bare bones night-watchman state in practice. The police will probably find your killer but they will make no effort to find your stolen bicycle. If you’re hit by a car, the nhs is likely to save your life. But if you require a hernia operation, you may wait a year or two (or give up and go private). A 19th-century concept of the state has collided with a 20th-century vision to create an intolerable 21st-century chimera.

The promise of a cradle-to-grave system has been replaced by a cradle-and-grave one, with the middle largely forgotten. Working-age benefits are terrible. Unemployment benefit is set slightly above destitution levels, at barely £80 ($91) per week, says the Resolution Foundation, a think-tank. That equates to 14% of average earnings or roughly half the level it was in the 1970s. In the Netherlands, this payment starts at 75% of someone’s last payslip.

In theory, the night-watchman state does little but is, at least, cheap. A welfare state may cost a lot but it provides a lot. The current British state falls between these two stools. Britain still has a comparatively low tax take compared with other rich European countries. But some people within the system are hammered, suffering Scandinavian-level marginal tax rates for South Carolinian services. A recent graduate earning £30,000 faces an almost Scandi marginal tax rate of just over 41% once national insurance and student-loan deductions (which behave like a tax) are included.

This situation will get worse. Einstein is said to have joked that compound interest was the most powerful force in the universe. He might have added: the second-most-powerful force is fiscal drag. If the government freezes the threshold for the higher tax rate of 40% at £50,000, a senior teacher will end up in a tax bracket designed for well-paid solicitors. As an added blow, once-universal perks, such as child benefit, are whittled when incomes hit £50,000. If nominal wage growth remains healthy, come 2027 a Londoner on an average salary (currently £42,000) would begin to lose their child benefit. Beveridge pushed his reforms with the slogan: “Bread for all…before cake for anyone”. Now the mantra is bread for some and cake is off the menu.

Taxes are high enough to create big expectations, but too low for them to be met. The contributory system, which allows people who pay in more to take out more, has enabled many northern European countries to remain generous. In Britain that principle is dead. National insurance is a bog-standard tax, even if people like to pretend it is a pot of money with their name on it. Pensioners are aggrieved that the state pension is lower than in, say, Ireland, even if it is much more generous than it was. Younger voters are fed up that the state provides so little yet takes so much, largely to hand money to older generations. There is little optimism that they will benefit in turn.

Even the literal night-watchman part of the state is asleep on the job. The proportion of crimes that lead to a charge has fallen from 16% in 2016 to 5.6% today. Petrol theft is in effect legal—at least according to a flow-chart that dictates whether an officer from the Metropolitan Police bothers to investigate the crime. Unless the number plate of the driver has been captured in the same situation before, the police will close the case. People can show the cops a live gps tracker of their missing laptop and be told that there is nothing that can be done. A stolen car is written off with an apologetic automated email from the police. The long arm of the law is rather short.

A broken light
Spared the worst of austerity, the National Health Service (nhs) is the only adequately funded part of the British state, and then barely. At times the nhs seems itself to be a pale imitation of the welfare state. Doctors will prescribe food vouchers for people to claim at a food bank, since in-work benefits are too low. One hospital trust has set up its own supported-living unit because the council is too broke to fund theirs. Elsewhere, a charitable wing of a hospital pays for local low-traffic neighbourhoods rather than the council that is actually responsible for roads. The nhs is burdened with such tasks while waiting lists are at historic highs of 7m. It has become the state of last resort.

Britain has always attempted to provide a welfare state on the cheap. An ageing population, forcing ever greater demands on a struggling state, means that this approach has run out of road. A part-watchman, part-welfare state does not work very well. In 1942, as the second world war raged, Beveridge wrote that “a revolutionary moment in the world’s history is a time for revolutions, not for patching”. Once again, the time for patching is over.

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Re: The state of Britain and the size of it

Post by Woodchopper » Mon Nov 14, 2022 2:57 pm

IvanV wrote:
Mon Nov 14, 2022 2:08 pm
I thought this week's Bagehot column in the Economist is worth a look. It steps back from the short term debate over the immediate way to fill the £50bn hole in the budget, but rather considers what I consider the key strategic question for public policy in Britain: the size of the state, the quality of public services, and the taxes you have to pay to get what people expect.

It echoes the observation we often make here that taxes aren't high enough for a decent quality of welfare state. It adds the observation that they are high enough to give people the expectation of a decent quality of welfare state. Recent graduates, with their student loan repayments, are paying Scandinavian levels of tax and getting US southern state levels of public service.
One important thing is that the quality of public services isn't just due to what is paid in tax.

As far as I can tell, average income for employed people in Denmark in 2020 was DKK 42 592.26 per month, or DKK 511 107,12 per year, which at an average exchange rate is GBP 62 357,5 per year.

Average income in Britain in 2019 was GBP 537.25 per week, or GBP 29 367.

I haven't worked out the subtleties (eg effects of benefits). But overall, on average Danes are earning twice as much as people in Britain. That probably has as much an effect on public services as tax rates.

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Re: The state of Britain and the size of it

Post by IvanV » Mon Nov 14, 2022 4:04 pm

Woodchopper wrote:
Mon Nov 14, 2022 2:57 pm
One important thing is that the quality of public services isn't just due to what is paid in tax.

As far as I can tell, average income for employed people in Denmark in 2020 was DKK 42 592.26 per month, or DKK 511 107,12 per year, which at an average exchange rate is GBP 62 357,5 per year.

Average income in Britain in 2019 was GBP 537.25 per week, or GBP 29 367.

I haven't worked out the subtleties (eg effects of benefits). But overall, on average Danes are earning twice as much as people in Britain. That probably has as much an effect on public services as tax rates.
I'm afraid I found that Danish statistics page very complicated to operate, and didn't know what I was doing, and it sounds like you weren't quite sure either. I couldn't reproduce what you did to get that number either, but from what mysterious numbers I got, my suspicion is you might have got something like a full-time-equivalent salary at 40 hrs per week, as it seems to be driven by an hourly wage figure. But I was driving on blind too.

You are clearly right, as general principle. But my suspicion is that the practical difference between Denmark and Britain isn't as large as the somewhat mysterious number you found suggests. And remember that Denmark has the 2nd highest income per capita in the EU after Luxembourg - (and Ireland, but the Irish figure is misleading due to accounting distortions, and usually adjusted down by about 35% for those distortions.) So perhaps not the best direct comparator to make.

Obviously, if a country has a higher income, the state can take and spend more money, and leave the same or more in the citizens' hands. Though bear in mind that comparisons at nominal exchange rates can exaggerate this. A wealthier country will have higher wages, and a lot of public services are labour-intensive, and so cost more local money to buy those services. For the same reason, transfers go further in lower wage countries, because people can buy more with the money they receive. So these comparisons are best made at PPP rates.

According to Eurostat household disposable income per capita for Denmark is not very different from Britain, at PPP rates which adjusts for what the money buys. (Though Britain falls off Eurostat in the most recent years.) Disposable income is after taxes taken by government - but including transfers which are recycled back to households. So a wealthier country can have a substantially larger amount in what the government keeps to pay for public services excluding redistribution, that is not reflected in this figure. But it makes implausible that the Danish employment income per household can be double ours, in a true sense.

What's cause and effect here? When Truss stood up and said Britain's taxes are too high and prevent growth, you have to ask how all those countries in NW Europe, that do so well in comparison to us, managed it when their taxes are so much higher than ours? Perhaps good public services are actually good for the economy and worth paying for?

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Re: The state of Britain and the size of it

Post by plodder » Mon Nov 14, 2022 6:06 pm

Isn’t part of it things like the sovereign wealth funds in Scandinavia where the state has made sensible long term investments?

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Re: The state of Britain and the size of it

Post by JQH » Tue Nov 15, 2022 12:00 pm

plodder wrote:
Mon Nov 14, 2022 6:06 pm
Isn’t part of it things like the sovereign wealth funds in Scandinavia where the state has made sensible long term investments?
Certainly in part at least. Norway invested profits from North Sea oil in a sovereign wealth fund rather than using it to fund tax cuts for the better off.
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Re: The state of Britain and the size of it

Post by IvanV » Tue Nov 15, 2022 5:21 pm

JQH wrote:
Tue Nov 15, 2022 12:00 pm
plodder wrote:
Mon Nov 14, 2022 6:06 pm
Isn’t part of it things like the sovereign wealth funds in Scandinavia where the state has made sensible long term investments?
Certainly in part at least. Norway invested profits from North Sea oil in a sovereign wealth fund rather than using it to fund tax cuts for the better off.
Norway is the only Nordic country with a sovereign wealth fund. So no issue in relation to Denmark, Sweden or Finland.

It may be a surprise to discover that France has the world's second largest sovereign wealth fund, after China. Though since Norway's is only a little smaller than France's, per capita Norway's works out about 10 times the size. The only other EU countries with sovereign wealth funds are Ireland and Austria, but they are very small indeed in comparison, another order of magnitude reduction per capita.

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Re: The state of Britain and the size of it

Post by plodder » Tue Nov 15, 2022 6:11 pm

Ok so what are the big differences? Productivity, whatever that means? What else - I know population density works against us in England especially, there’s always someone complaining whenever you try and do anything. We also have a strong environmental lobby? Arcane planning laws? Lack of useful skills?

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Re: The state of Britain and the size of it

Post by IvanV » Wed Nov 16, 2022 10:25 am

plodder wrote:
Tue Nov 15, 2022 6:11 pm
Ok so what are the big differences? Productivity, whatever that means? What else - I know population density works against us in England especially, there’s always someone complaining whenever you try and do anything. We also have a strong environmental lobby? Arcane planning laws? Lack of useful skills?
Netherlands and Belgium have similar population densities to England (and I say England intentionally), and are also rather better economically developed. Belgium is notable for a sclerotic planning system and chaotic public administration, so you can do well with at least that one problem. The Dutch are quite heavy on detailed rules for doing stuff.

As the Belgium indicates, you can get away with certain problems. I think our issue is numerous problems, which you could get away with a small subset of them, but when you add them all up, it becomes large. I think our biggest problems relate to:
  • The persistent power of vested interests and elites - for centuries we limited their influence better than most other places, but recently our neighbours have done a better job - the book Why Nations Fail is very strong on why this is such a damaging problem for a country's development.
  • Political, legal and planning systems that cause delay, high preparation cost, and result in disproportionate focus on relatively unimportant issues
  • An education system that performs poorly for the less gifted, resulting in a vicious circle of disinterest from the parents and poor outcomes for theit offspring, and also fails to produce specific productive skills (plumbers, doctors, etc) in the quantities the country needs
  • Low levels of redistribution resulting in higher levels of social exclusion - and feeding back to that vested interests problem
  • Something very wrong with our finance and industrial investment system which means that so many innovations developed here get invested in and built somewhere else, often with finance arranged by the same London financiers that wouldn't invest in a British scheme
  • Over-centralisation. Local authorities direct only 6% of public spending in Britain, much lower than most developed countries of a size where it would matter.
There's also this issue of misdirection of talent - I don't know whether it is a big issue or not. Some people have written fairly convincing studies suggesting that our our over-grown financial sector sucks up so much of the country's talent, there's materially less good people left for actual doing stuff, be it public administration or commercial production. Walter Scheidel's magisterial book on the economic history of inequality, that I recently mentioned, The Great Leveler, observes that rewards for the same level of education/skill at managerial level and upwards in the finance sector in Britain are double what you can get in other sectors.

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Re: The state of Britain and the size of it

Post by plodder » Wed Nov 16, 2022 10:39 am

That’s a helpful list that rings true, thanks

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Re: The state of Britain and the size of it

Post by Woodchopper » Wed Nov 16, 2022 10:48 am

IvanV, yes, that looks about right.

Having spent a lot of time in Denmark I'll suggest that two big differences there are:

- A much better education system. In particular it has private schools but they are few and are heavily subsidized by the state. They are to provide a distinctive education according to a philosophy etc and not a means for affluent parents to buy their children a better education.

- High taxation and redistribution along with a much more egalitarian outlook on life means that there are fewer vested interests and its much easier for bright and hardworking people to succeed. So people are much more motivated to invest in themselves and others.

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Re: The state of Britain and the size of it

Post by bjn » Wed Nov 16, 2022 7:20 pm

IvanV wrote:
Wed Nov 16, 2022 10:25 am
  • Something very wrong with our finance and industrial investment system which means that so many innovations developed here get invested in and built somewhere else, often with finance arranged by the same London financiers that wouldn't invest in a British scheme
Hell yes. I've been in involved in a number of capital raises and various other equity transactions for UK based software companies that I've started. On the whole, but not exclusively, UK finance is cowardly and profoundly hidebound. US investors are much more open to innovation and risk.

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Re: The state of Britain and the size of it

Post by plodder » Thu Nov 17, 2022 7:48 am

bjn wrote:
Wed Nov 16, 2022 7:20 pm
IvanV wrote:
Wed Nov 16, 2022 10:25 am
  • Something very wrong with our finance and industrial investment system which means that so many innovations developed here get invested in and built somewhere else, often with finance arranged by the same London financiers that wouldn't invest in a British scheme
Hell yes. I've been in involved in a number of capital raises and various other equity transactions for UK based software companies that I've started. On the whole, but not exclusively, UK finance is cowardly and profoundly hidebound. US investors are much more open to innovation and risk.
Is that because in the UK very posh people also have a tradition of being extremely spendthrift (once the Range Rover, château and other essentials are taken care of)?

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Re: The state of Britain and the size of it

Post by bjn » Thu Nov 17, 2022 9:06 am

plodder wrote:
Thu Nov 17, 2022 7:48 am
bjn wrote:
Wed Nov 16, 2022 7:20 pm
IvanV wrote:
Wed Nov 16, 2022 10:25 am
  • Something very wrong with our finance and industrial investment system which means that so many innovations developed here get invested in and built somewhere else, often with finance arranged by the same London financiers that wouldn't invest in a British scheme
Hell yes. I've been in involved in a number of capital raises and various other equity transactions for UK based software companies that I've started. On the whole, but not exclusively, UK finance is cowardly and profoundly hidebound. US investors are much more open to innovation and risk.
Is that because in the UK very posh people also have a tradition of being extremely spendthrift (once the Range Rover, château and other essentials are taken care of)?
Dunno. I've had had a total of one UK VC pony up when we were scraping around for capital, the chap was posh but canny. Also child of immigrants.

ETA : went to a posh school that is.

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Re: The state of Britain and the size of it

Post by Woodchopper » Thu Nov 17, 2022 9:32 am

As much as I’m into cultural explanations could the difference just be due to the size of the sector? Which as far as I know is much larger in the US. A larger fund will be willing to take risks with a meaningful amount of money for the startup. When there are a lot more funds it’ll be easier to find one that is interested.

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Re: The state of Britain and the size of it

Post by Grumble » Thu Nov 17, 2022 9:36 am

plodder wrote:
Thu Nov 17, 2022 7:48 am
bjn wrote:
Wed Nov 16, 2022 7:20 pm
IvanV wrote:
Wed Nov 16, 2022 10:25 am
  • Something very wrong with our finance and industrial investment system which means that so many innovations developed here get invested in and built somewhere else, often with finance arranged by the same London financiers that wouldn't invest in a British scheme
Hell yes. I've been in involved in a number of capital raises and various other equity transactions for UK based software companies that I've started. On the whole, but not exclusively, UK finance is cowardly and profoundly hidebound. US investors are much more open to innovation and risk.
Is that because in the UK very posh people also have a tradition of being extremely spendthrift (once the Range Rover, château and other essentials are taken care of)?
Spendthrift is the opposite of thrift, almost. It’s someone who spends all the savings from thrift.
A bit churlish

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Re: The state of Britain and the size of it

Post by dyqik » Thu Nov 17, 2022 11:02 am

plodder wrote:
Thu Nov 17, 2022 7:48 am
Is that because in the UK very posh people also have a tradition of being extremely spendthrift (once the Range Rover, château and other essentials are taken care of)?
I suspect that the UK's real estate sector might be some of the problem - investing in land and property in the UK is relatively profitable due to the rate that property values rise, and very safe.
Compare that to the US, where real estate isn't nearly as reliably profitable.

And then add in the historical Tory/upper class culture that owning huge tracts of land is the only respectable wealth, vs these noveau-rich factory owners building their mills and inventing steam engines...

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