High taxes don't pay

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Denmark is often looked at as a society that is somewhat fairer and more equal than ours. This view is mainly due to an economic system fundamentally based on very high levels of taxation and generous welfare payments. However, the Danish system is sometimes referred to as "flexicurity" since it has a uniquely liberal approach to hiring and firing which has allowed the country to produce growth figures of some 3.5 percent in 2006 whilst approaching full employment. Nonetheless, this approach still isn't without its problems. There seems now to be a brain drain occurring, with Denmark having to face up to European (as well as global) tax competition.

In key areas such as the highly skilled they are suffering from a shortage. This is highlighted by The Confederation of Danish Industries' estimation that through the end of 2005, the workforce had shrunk by around 19,000 Danes, mainly through them leaving the country. This outflow is not being matched by the inflow of foreign workers, which tends to lower levels of skill. One of the key reasons for this brain drain is the high taxation that highly skilled workers have to pay to keep the lavish welfare system going. Faced with paying 63 percent of their own income to the government, many understandably decide to leave and take advantage of the lower rates around Europe.

Unless something changes, the Danes may be facing growth figures of only around 1 percent for the 5 years from 2009 onwards. The obvious approach to this problem is to lower the tax rates to more competitive levels, attracting Danes back and enticing in others as well. The Danish only need to look to London to see how lower taxation on high earners can promote growth. Alternatively though, we could always ship over those on the left who love the Scandinavian model of taxation and welfare. Then they can pay the tax bills.

Brown's big idea

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In his speech to the CBI yesterday, Gordon Brown signalled that he was planning to put welfare reform at the heart of political fightback, announcing an overhaul of the system to "move claimants from passive recipients of welfare benefit to active job and skill seekers." JobCentre Plus functions look set to be contracted out to the private sector and claimants may be compelled to take jobs that are offered to them or face losing their benefits.

Good. The Conservatives have already seized on this topic, and I am glad to see the government following suit. As our recent report Working Welfare makes clear , this is one of the key challenges facing the country. Aside from being a drain on the economy, worklessness breeds inter-generational dependency, health problems and crime and among other social ills. By actively deterring people from entering work, the welfare state is hurting the very people it was designed to help. Radical change is long overdue.

My worry, however, is that the government may not be willing to think radically enough, given their historic ties to the welfare state and their attachment to redistribution and 'social justice'. After all, Frank Field MP was once asked by Tony Blair to 'think the unthinkable' on welfare reform and was subsequently fought by Brown every step of the way.

Has the Prime Minister undergone a Damascene conversion? Is he prepared to cut taxes for low-income workers, simplify the tax credits scheme and make work absolutely central to the benefits system? Well, perhaps... but I won't be holding my breath.

The Swedenization of America

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Following the failure of George W Bush’s social reform – labeled the "ownership society" – there is one question that conservatives cannot escape in the run up to the presidential election. Is there any prospect of reclaiming limited government again? An interesting debate getting started.

Military spending is not the problem. Despite Iraq and Afghanistan, defense spending accounts for only 20 percent of the federal budget or 4 percent of GDP – lower than during Jimmy Carter's presidency. Driving big government has been the 65 percent of the federal budget (or 13.1 percent of GDP) spent in 2003 for "human resources" - the budget category including Social Security, Medicaid, Medicare, Veterans programs etc.

At least overall spending has slightly improved: from 22.2 percent of GDP in 1981 to 20.3 percent now. But despite two decades of the conservative think tanks churning out concepts for shrinking the welfare state, federal government is bigger and more influential now than in1980, when Reagan famously said: "government is not the solution to the problem, government is the problem".

Unfortunately it seems much harder for conservatives to dismantle the welfare state than for 'liberals' to build it. As the New Republic stated, celebrating the 10th anniversary of a rare conservative victory, the abolishing in 1996 of the Aid the Families with Dependant Children:

Welfare bashing has lost its political resonance…(and) welfare reform has expanded the constituency for activist government. Democrats now have more political room to fight Republican austerity – and to propose, in its place, a stronger safety net.

If American conservatives where not able to use the prosperous past decade in power as an opportunity to reduce the public sector, what can they possibly achieve in the more difficult years of retiring baby-boomers that lay ahead?