Need, not a magic number, should determine size of the state

Ironically, one of strongest views expressed about the size of the state in The Orange Book was by Vince Cable, subsequently more usually associated with wanting more state spending during the recession but at the time of The Orange Book wishing to see a cap introduced on the level of state spending.

Jeremy Browne has more recently talked of wanting to reduce the size of the state to around 35-38% of GDP but more significant has been David Laws’s comments which in effect put any push by people such as himself in the party for reducing the size of the state into the deep freeze.

Laws attacked the Conservatives, saying:

Their desire to shrink the state by continuing to cut spending long after the deficit has been cleared trumped their rhetorical commitment to expanding opportunity for young people. Clearly a political dividing line on fiscal policy matters more to them than the effort to reduce poverty and expand life chances.

That is a view which social liberals in the party readily agree with. It’s also a welcome recognition of the huge pressure there will be for increases in spending once the structural deficit has been cleared.

Delivering a Liberal Democrat vision of society, including sufficient resources for health care, healthy long-term investment in infrastructure and ensuring children’s education is not held back for want of resources, will all put pressure on spending. Even more so because, as I pointed out in Liberal Democrat Newswire #50, the party’s current tax and spend commitments are likely to require in the short-term further cuts in areas dear to the party such as local government.

As a result, the best prospects for the size of the state falling will come from a long period of healthy economic growth, which would let the size of the state could fall as a proportion of GDP despite year by year increases in public spending. Of course, it isn’t only right wingers who would – or should – argue for that. It’s the other half of Keynesianism too – opening the financial taps during a recession, but retrenching in the good times so that you have the headroom to deal with the next recession when it comes.

The problem is, as Tim Harford has pointed out, that although the economic evidence points towards ‘right wing’ economic policies being more suited to the good times (such as reforming welfare – because then you have a healthy job market and the funds to help people through difficult transitions) and ‘left wing’ economic policies are more suited to the tough times (because deficits are the answer to recessions), the electorate tends to operate exactly the other way round.

But that’s why for the Liberal Democrats it is important that we don’t become fixated on some magic number for the size of the state. What matters is it being the right size for the current circumstances – and that number changes as circumstances change.