Article by Matthew Lynn published on September 2, 2014, in The Telegraph.
Motorways you can actually drive along without hitting jams, most of the time at least; trains that whizz through the countryside at a couple of hundred miles an hour; high quality healthcare with no waiting lists; shorter working weeks and lower retirement ages – across many European countries, there is a belief that taxes might be higher but the pay-off is that you get a higher quality of life.
In this country also, plenty of people will argue that we should be willing to pay a bit more to the Government so that better public services can make us better off. The trouble is, it is not true.
A recent study by the Institut Molinari in Brussels took total EU tax rates and compared them with the quality of life indexes calculated by the OECD and the United Nations. And what did it find? That, in fact, there is no link between taxes and a good society. Some of the highest-taxed nations score relatively poorly on all the available measures for how people feel, while their lower taxed neighbours score much higher. Europe’s high taxes are not delivering on their promises.
The argument for higher levels of taxation has always rested crucially on delivering a higher quality of life. It is a powerful theme and one that refuses to go away. The Labour leader, Ed Miliband, was at it again this week, suggesting a “health tax” dedicated to the NHS on the simple assumption that so long as enough money is spent on it the level of care will improve.
It has dominated the Scottish independence debate, with the nationalists campaigning on the theme that a big state Scotland will be a better place to live than a more free market United Kingdom dominated by English Tories. Across the EU it is taken as a given that very high levels of taxes and public spending are needed to maintain a quality of life that is superior to America or Britain.
It should be an easily testable proposition. In the countries with higher levels of tax, people should be happier; reported levels of well-being and life satisfaction should be higher; overall, society should be better off than in the countries where taxes are lower.
The Institut Molinari crunched the numbers. There are two main surveys of the quality of life, one calculated by the OECD, and one by the UN. Both take a range of indicators to assess how happy people are with their country. It then compared the results with the levels of tax.
The highest-taxed country in Europe is Belgium, where the government takes 59pc of GDP, once income, sales and corporate taxes are taken into account. The next highest is France, where the state collects 57pc of GDP, which means French workers are working until July 24 each year until they are making any money for themselves. It is followed by Austria, Greece and Germany. The UK ranks fairly low down the EU scale, at 23rd – worse than Cyprus, Malta and Ireland.
So how does France come out in quality of life surveys? True, the French might have long lunch breaks, accompanied by a glass of red wine, and spend most of August by the beach, but overall they do not do very well.
The UN’s Human Development Index (HDI) was developed to take a group of measures other than just economic growth to measure general well-being, including factors such as health, life expectancy and education. The 2014 report ranked France 20th out of the 177 countries it surveyed. Within the EU, it ranked in 8th place. Belgium came in slightly below, in 21st place globally and 9th in the EU. Within the EU, several lower-spending countries, such as Austria, Finland, Slovenia and Denmark, all got better HDI scores. So did several countries outside the EU, such as Switzerland and the US, where government spending is much lower.
It was a similar story with the OECD’s “A Better Life” report. That index takes an even broader range of factors, such as housing, civic engagement, safety, work-life balance and the environment, to come up with a definition of how well society is working. Again, you might expect the high-tax counties to do better on those measures but France came in at only 18th out of 36 countries surveyed. Belgium did slightly better but nowhere near the top. Lower tax countries such as Ireland, the UK, Finland and Denmark all did much better. Low-tax Switzerland topped the ranking globally, followed by Norway.
“All this suggests that France’s high labour costs and tax pressure cannot be explained by better than average services and, instead, that it’s public and social benefits are not cheap,” concluded the Institut Molinari.
The numbers make it clear that higher taxes are not delivering the better quality of life usually promised. Instead, they are a very expensive way of doing things that people could usually do better for themselves.
True, there are always going to be some achievements. When the public sector is spending more than 55pc of GDP, as it is in France, Belgium and several other European countries, it is going to get some things done. There will be some excellent motorways and gleaming high-speed trains and a privileged group of mainly public sector workers will get to retire early on generous pensions. But even the Soviet Union managed to build some decent spaceships. The fact that a few impressive things get done proves little.
The problem is that, while higher public spending produces some benefits, the higher taxes that accompany it also produce significant costs. You may get earlier retirement but it will also take you a lot longer to find a job in the first place because unemployment is so high. Your children are likely to be mooching around the house for a lot longer because there are no jobs for them. You might have quicker healthcare but the stress created by the constant threat of redundancy as companies try to shrink expensive labour forces will lead to unhappiness, which will reduce health levels overall. There may be more generous welfare benefits but, if people are getting paid less because the economy is stuck in a depression then overall health levels are better. The 23pc of young people in Belgium who are unemployed don’t worry much about work-life balance – because they don’t have any work.
As the election campaign gets into full-swing next year, there will be lots of shallow promises about how austerity needs to be slowed down and about how we need to spend more on schools, hospitals and the environment. Yet, the evidence from our neighbours across Europe is conclusively that more spending, and the higher taxes to pay for it, neither produces wealthier societies nor happier ones. Everyone ends up worse off.