Defending Taxation and Spending against 'the Race to the Bottom'

Garret Fitzgerald, in a very interesting review in Saturday's Irish Times of Stephen Collins's new book on the PDs Breaking the Mould, has criticised the "populist inconsistency" of the party's stand on taxation.  Fitzgerald agrees that the PDs deserve some credit for raising questions as to the right balance between lower taxation on the one hand and better social and public services on the other. But, he claims, the PDs have consistently argued this in ideological terms, rather than seeking pragmatically a better balance between these two strategies.  For electoral reasons the PDs have always emphasised the importance of reducing levels of personal taxation - largely because they were going for a solidly middle class electorate and were making no pretence at being a catch-all party.  This was a mistaken emphasis, according to Fitzgerald, because it was "low corporate taxation - a Fine Gael/Fianna Fáil policy that pre-dates the PDs by 30 years - that principally generates economic growth."

The former Taoiseach then makes the point that the price Ireland has paid for reducing personal taxes to the lowest levels in Europe has been the creation of the most unequal society in Europe.  But serious economic damage has been done as well "because of the PDs' populist pursuit of this objective in tandem with their fellow-ideologue Charlie McCreevy's largely wasteful or unproductive spending increases, at a time around the turn of the century when impending full employment was already creating inflationary pressures".  Such policies have resulted in a serious loss of competitiveness over the last four years. 

There is an assumption that, in the age of globalization, taxation and state expenditure must be constantly pared back in order for national economies to remain competitive.  It's further assumed that the high taxing and high spending welfare states of continental Europe have had their day and must reorient themselves to more 'neoliberal' regimes.  Some welcome this move towards Anglo-American style capitalism while others fear 'a race to the bottom' and the end of a viable social democracy.  If the 'race to the bottom' hypothesis was correct then one should observe that countries that spend a lot on social social security would pay a price in terms of competitiveness.   Wouldn't it be surprising then if it turned out that those states that are high taxing and high spending are well above average in terms of competitiveness in a comparative analysis of OECD states?  But this is precisely what has emerged from such research. 

Let's look at official OECD definition of competitiveness:  "the degree to which a country can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term".  The definition can have many dimensions and price competitiveness is just one of them.  Obsession with labour costs and the imperatives of a low tax and spend regime can cause other dimensions to be overlooked such as the capacity to innovate - something that is bound up with the quality and the motivation of human capital.  The bottom line is that nations with a poorly motivated and insecure workforce will not be innovative and this will lead to poor levels of competitiveness in the long run.  Conversely, generous levels of social provision will increase people's sense of security and will make them more willing to accept change. 

Comments

[simon]

The bottom line is that nations with a poorly motivated and insecure workforce will not be innovative

Also it could be said that employes that are secure in there jobs can become lazy while if they are in danger of losing there jobs then they feel the need to earn there keep by being inovative.