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Optimal Size of the Public Sector Essay

Reduced Tax Base Due to Recession Induced Long Term Unemployment Therefore we anticipate zero to almost no economic expansion and a modest drop in the unemployment rate, leading to the assumption of higher than normal state expenditures for longer than normal and larger populations of the unemployed, underemployed or retraining individuals.

Given the general uncertainty from almost every analyst and source (as shown below) we remain very conservative about projections of new, much less higher state revenue for at least the next five years, generated by payroll and corporate taxes. Figure 4: Various Unemployment Projections, 2009, HM Treasury, Institute For Fiscal Studies, p. 15 Projected Income Streams For Government & Their Sources Based on Traditional Economic Forecasting

Following this logic, we have based our tax modeling on extremely conservative income streams that assume high levels of unemployment for an extended period of time (approximately five years) although we anticipate that the structural damage done to the global economy will last much longer than that based on the work of leading international economists such as Nobel winning economist Paul Krugman (Krugman, P 2009, ‘The Return of Depression Era Economics and the Crisis of 2008’) in the United States who estimate a so-called “lost

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” Furthermore we assume the workforce will continue to morph as the new economy continues to change, and that the workforce will no longer be what it was in the “old” economy. ” While in the short term this will most certainly lead to a longer unemployment period for some, in the long term, this will mean that more consumers will shop online as retailers find that shop fronts are unnecessary overhead and that a central warehouse with outsourced teleworkers, selling from their websites is a much cheaper and simpler business model.

Therefore we need to capture revenue from such activity. And plan on reduced tax revenue from commercial real estate while increasing the ease in which teleworkers can establish home offices, with an associated tax structure to accommodate this new reality. Increased Income Streams From Private And/Or Public/Private Infrastructure Companies

Due to the planned expansion of the cleantech economy and in particular the smart grid throughout EMEA, we anticipate that there will be government financing and private investment in cleantech – particularly smart grids (clean energy development, distribution and greening real estate). While this will entail government expenditure, this also represents a source of income for the state in terms of taxation of private firms and their employees. Furthermore it represents income in the form of carbon auction proceeds.

Re-Examination and Calibration of Taxation System to Progressive System As is clear from the example of the United States, the unfair and unequal taxation policies of the last thirty years have led to unprecedented inequalities of wealth distribution amongst the richest and poorest sections of the economy (see graph below). Figure 5 – Income Disparity in the United States Due to Taxation Policies 1917 – 2007 Saez, E. , 2009, Income Disparity In The United States

This disparity between rich and poor, created by regressive taxation polices that put greater tax burdens on the poor and middle class, reduce taxes on investment income and inheritance taxes, do nothing more than transfer wealth and create income disparity gaps of horrific proportions, rather than create incentives for economic development as many have argued (an analysis born out today by for example what is happening in the United States, where in the face of the government bailout of Wall Street, once the banks were saved, even commercial lending has come to screeching halt, while the rescued banks continue to make record profits thanks to no interest loans from the Federal Reserve all at the taxpayer expense, while the average taxpayer in America continues to suffer at unparalleled levels), creates greater burdens on governments to provide services we cannot afford to the nation’s most needy at the same time we are cutting budgets by cutting taxes, in times when our own budgets cannot cover such expenses because of said cuts.

Reduction in Public Expenditures & Services, 2009, HM Treasury, Institute For Fiscal Studies, p. 4 Therefore it is imperative that a progressive system of taxation is implemented for individuals and corporations to insure such disparities do not occur.

The VAT should be, at least for a trial period, suspended, even though, as shown in the chart below, it makes up for the vast majority of income generated for the state, second only to National Insurance Contributions which should also be revamped to be more progressive. As it is, at least in the UK, the system is ridiculous anyway. For example the VAT Climate change levy does not apply to fuels used in the transportation sector or for electricity generation, which is ludicrous if you think about it, not to mention counterproductive. These are EXACTLY the industries that the tax should be applied to first. (Adam, S. , Browne, J ‘A Survey of UK Tax System’, p. 20) Our model does.

While this may be considered a novel if potentially risky move, we will show herein that such risks will be more than hedged by other income generated by other means. It also does not mean we will entirely scrap what works – for example applying a massive levy on dirty industry in for example the dirty industries like the transportation and energy industry that should be converting ASAP to clean energy use and generation. There is no better incentive, particularly for those corporations who are private and answer to shareholders than the bottom line. A stiff if not draconian levy for NOT going carbon free in a hurry will certainly provide the necessary incentive to do so.

This is common sense, apparently a commodity in short supply in politicians in England who set up such ridiculous rules to begin with. There are also several options we could try to test the paradigm: namely in a region of the state for a trial run for certain period of time as a trial run to see if our assumptions are correct. However, our modeling and extensive analysis and testing shows that it does. And that by using this paradigm, we will show other ways to substitute for that income, if not outperform traditional models of state income generation, bringing in additional revenue for the state to be used for deficit reduction, continued infrastructure redesign and social programming where needs are identified.

The cleantech economy, specifically decentralized clean energy production and distribution, along with other green businesses we hope will spring up (and even potentially fund) to meet demand, (and perhaps even fund if plans go as well as we anticipate) will generate tax revenue for the state that will replace a regressive tax, and one based on a “dirty economy. ” Not to mention eliminate other expenses that are directly related as we discuss further on. We also have sketched out plans for participation in the carbon auction, even for the average citizen, and carbon penalties for still dirty CO2 generating industries will also generate income for the state similar to the pollution levies currently in place throughout EMEA.

We have planned to penalize them heavily to facilitate the transition to a much more efficient, higher revenue and job generating economy and furthermore to generate income for the state to fund its needed construction of infrastructure to a cleantech economy. Deadweight Costs One of the biggest issues that we examined was so-called “deadweight” costs or inefficiencies in government spending and infrastructure that could be eliminated, thus reducing or eliminating government spending on them. There are too many to include in a summary report, but there are several in particular we wish to highlight. The Necessity to Replace Old Dumb Infrastructure & Invest in Cleantech, Smart Grids & Infrastructure

We have recommended further study be taken on the use of wireless distribution via smart grid, of clean energy, however generated, as one of the biggest cost savers in terms of infrastructure savings already identified. And overall, the solutions of cleantech, from greening buildings, particularly those maintained by the government (i. e. council flats) will both generate electricity and reduce costs for private citizens, thus increasing consumption and market growth in other areas of the economy and reducing state expenditure on state sponsored housing. Just the graph below, which shows the overall percentage of local government spending by service in England as a comparative (in 2006) proves this modeling and predictions to be correct.

Just by greening transportation and housing, which represent 47% of the state’s capital expenditure (with housing being the state’s single largest line item for capital expenditure overall) you have created a system of potentially a green energy source generation and distribution source, plus a totally green transportation system and green energy battery and storage system, not to mention a mobile smart grid that is impervious to for example a cyber attack or even a widespread outage caused by an act of God, a downed power line, or merely a malfunctioning generator. It does not mean that additional energy generated via this system (which can certainly be achieved even today) cannot be fed back into a central grid) but it turns the traditional model of centralized utility providing electricity on its head. Nonetheless, while this may sound again unconventional to a First World Western country, it is a strategy that has already been proven to work in other countries. Namely the third world.

It is quite frankly racist, and a sign of cultural elitism to ignore what works in for example India, because they happen to be a non European country. Not to mention the definition of stupidity. Carbon Auction Revenue Our models, analysis and recommendations not only stimulates the economy, creates jobs, clean and cheap energy (which is essential for economic growth) but also, if generated on council housing, creates additional income for the government in terms of clean carbon credits to sell in the carbon auctions. A substitute for tax income without cutting needed services and without creating tax increases on those who can afford it the least, much less “soaking the rich.

” If applied to private homes, it increases housing value by as much as 15% (at least that’s the American estimate according to the Federal Housing and Urban Development Agency), creates passive income if the home is energy positive, and again the homeowner could possibly also participate in the carbon auctions, bringing in not only additional easy income for themselves, but taxable income for the state, easily auditable and traceable because of course all transactions would be done online. Figure 8: Local Government Capital Expenditure in England, by Service, 2005-2006 (? million & % of total) Department for Communities and Local Government, Local Government Finance Statistics England No. 17, 2007 Table 4. 1c Rethinking Council Housing We have even discussed turning redesigning council housing itself.

Rather than privatize it, we have discussed turning such complexes into economic incubators, for residents who need temporary residence and while there, each resident would receive education and/or job training, which might serve to remodel the role of the “welfare state” recipient, as well as retrain them, and turn both the council housing model and its occupants into tax producing citizens who run their own small businesses on site, produce income for the state instead of living on the dole, while reducing if not eliminating public expenditures on maintaining said housing, particularly if creative solutions like rooftop solar thermal were installed on the roof to make such blocks energy positive buildings that could even sell clean energy back to the grid.

While this is not a conventional approach in the First World, we have analyzed a holistic, global approach and systems used throughout the world, including the developing one, and have come back with some interesting statistics which we believe are both relevant to our situation, but can further save the government money, while providing better customer service as quoted below. Although this was written about the U. S. market, it is certainly applicable to our country too and demonstrates quite admirably the kinds of savings JUST IN INFRASTRUCTURE COST, not to mention the additional benefits already identified of going this route. “Although the U. S. market for distributed generation is substantial, perhaps the greatest potential is with the world’s 3 billion poor people who have no reliable access to electricity. On-site generators, as noted before, can save the $1,500 per kilowatt that developing countries would be required to spend on transmission lines.

They could allow those nations to leapfrog the power grid, eliminating the need to build an expensive system based on giant generators and high-voltage wires, much the way that some countries are using cell phone technology to leapfrog the need to string expensive telephone landlines. If electricity consumption in developing countries continues to rise rapidly, dispersed technologies-such as efficient turbines, recycled energy, wind turbines, and fuel cells also may be the best means to minimize carbon dioxide emissions and limit demand for oil and natural gas from the world’s volatile regions. ” (Munson, R. 2005, ‘From Edison to Enron: The Business of Power and What It Means for the future of Electricity. ’ Praeger: Westport, CT, p. 179)

Furthermore, while we advocate sensible spending on a cleantech infrastructure and cuts have been identified wherever possible, including even in this area for already clearly unworkable or inefficient programs, we strongly recommend both a budget for an advert campaign for public transportation (albeit greened), while at the same time encouraging teleworkers strategies via various incentives offered both through government and through the private sector through such programs as tax breaks to cut down on other costs (such as maintaining a transportation fleet, roads themselves, etc. ) Increased Integration of People with At this juncture in time, we have no recommendations on the optimum size of the public sector, simply because we know how drastically the landscape will change even over the next five years due to a number of factors. These are: 1. The decrease in government spending 2. The paradigm shift in the economy 3.

The impact of alternative revenue sources and means to manage them, such as carbon credits that will change both the traditional means of collecting and generating income for the government and the need to hire workers to insure that government functions. We recommend that we begin to tackle the problem in a systematic way, perhaps starting with what we consider the most strategic verticals that the government spends the most money on to begin with, in terms of capital outlay and are also precisely those areas that will be most affected by cleantech – housing and transportation. We could also focus on healthcare, given the size of public expenditure as a total outlay of the whole.

Those would be our three top picks to start to examine new models and paradigms for the right mix of government in the economy and the right size for it.


Reduction in Public Expenditures & Services 2009, Institute For Fiscal Studies, HM Treasury Sources of government revenue 2008-2009 Forecasts 2008 HM Treasury Pre-Budget Report 2008 Various Unemployment Projections 2009, Institute For Fiscal Studies, HM Treasury Adam, S. , Browne, J A Survey of UK Tax System, Institute for Fiscal Studies Briefing Note No. 9 Chote, R. , Crawford, R. , Emmerson, C. , Tetlow, G 2009, Britain’s Fiscal Squeeze IFS Briefing Note BN87, Economic & Social Research Council Krugman, P 2009, The Return of Depression Era Economics and The Crisis of 2008, W. W. Norton and Company, New York, NY https://portal.hud.gov/hudportal/HUD

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