Toward Stagnation?

The economic clouds just overhead had parted, but those on Britain's horizon were as threatening as ever. Last week the London Economist had some cogent points to make about taxation and the future of the welfare state.

The Economist places the present price of government (including social services) at 40% of the total of all income, personal and corporate, in the nation. (This compares with about 25% in the U.S.) The Economist believes this proportion is likely to rise because:1) defense spending is going up, 2) established social service programs call for expansion and 3) new governmental services may be established.

Says the Economist: "A state which taxes away 40% of all incomes, and much more of the incomes of the successful and energetic, is killing the motive power that keeps it alive."

No Capital? The Economist wants to know how a state that takes 40% of all income is going to find enough savings to maintain its capital. "The harassed Chancellors of the Exchequer of the future will be hard enough put to it to balance their [current] books, without putting on still more taxes to provide a fund of public savings."

The American, not yet familiar with all the implications of the welfare state, may ask why capital has to be replaced out of "a fund of public savings." When new machines or other capital goods are needed in the U.S., they are normally paid for by the investment of the savings of those private individuals who have more than they require to support life. In general, these individuals make up "the middle class."

Writing primarily for Britons, the Economist does not have to explain why this process no longer works in their country. Had it needed to, the Economist could have turned to some figures released last week by the Oxford University Institute of Statistics. These show, that in the years 1938-47, the real income after taxes of the British middle class* dropped 9%, while that of the working class rose 7%. To hold its part of the middle-class vote, the Labor government checked this trend in 1948, but the Oxford report expects it to be resumed: "The movement toward equality is quite noticeable," it concludes.

By standards of social justice and decency, the rise in working-class incomes may be approved--certainly the majority of Britons approve it. But approval does not answer the question: Where is the money coming from to replace capital equipment as it wears out? Less & less of it will come from investment by the gradually impoverished middle class, and this will certainly not be balanced by more & more capital investment from the rising working class. The new income of the working class will not go into capital goods; it will go into more milk, more education, more dentures.

If replacement capital cannot come from individuals of either class, it must come from the state. Can the state, without calamity, take a higher bite in taxes out of all the incomes of its citizens? The Economist thinks not. In fact, it said: "The long continuance of taxation of anything like 40% of the national income will ruin the country. It will not do so spectacularly in any one year or the next--there might be more hope if it would."

No Escape. The 40% can only be reduced by cutting governmental services or by increasing total output. "The whole face of British politics will have to change," the Economist believes, before substantial cuts can be made in education, health service, unemployment insurance, old age pensions or housing subsidies. The hope of steadily increasing the total national output, the Economist considers to be dim, especially in view of the heavy tax load that inhibits investment in capital goods.

The Economist concludes: "This, then, in public policy is the irresistible force meeting the immovable object ... It must be honestly said that there is no apparent escape from the dilemma. Unless the price of government is reduced, the British economy will gradually strangle itself. But there is no prospect at present visible of any substantial reduction in the price of government."

* "Middle class" is defined in the report as made up of those who live on -L-250 ($1,000) a year or more. The 84% of Britons who have less are "working class."

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