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This paper is Reform‘s main submission to the 2007 Comprehensive Spending Review (CSR 2007).
It follows the model of the Treasury’s November 2006 scoping paper. It identifies the main global and domestic trends for the next decade together with the key lessons from UK post-war history. It then proposes policy responses.
It seeks to reflect the latest research, in particular regarding economic growth and education and skills.
The key trends for the decade will be globalisation and competition, technological change and demographic change. To this extent this paper agrees with the Treasury’s analysis, but its reading of the trends differs strongly.
Globalisation will give great advantages to countries that achieve a more favourable tax/spend balance. It will increase the importance of innovation and so private sector consumption; competition from low-tax countries in Asia and the New Europe; and the influence of international markets over micro-economic policy.
Technological change will increase the importance of skills (“skills-biased technological change”). The latest US research indicates that this is the key reason for differences in income growth over the last three decades. It will also increase costs of public services such as health.
Demographic change will increase the pressure on young people. Older generations in the UK face a positive future based on strong housing equity, advantageous tax allowances and benefit increases. Younger people still pay 35-40 per cent of income in taxes but also, increasingly, fund services such as higher education and pensions. They are a cross-over generation that must fund the existing welfare state without expecting to enjoy all of its benefits.
Taken together these trends suggest the following key policy objectives: