In recent years, the leftist parties of England and Germany returned to power by promising voters that they had turned their back on command and control, tax and spend, economic policies. Instead they promised to “transcend” the old right and left by pursuing an ill-defined “third way.” Recent policy actions by Tony Blair’s Labor party in England and Gerhard Schroeder’s Social Democratic party in Germany suggest that the “third way” is splitting into two distinct paths. England appears ready to boost the government’s size and spending, while Germany appears on a path to reduce taxes and government interference in the economy.
In England last week, Blair’s Labor party announced a new budget that promised to expand government spending by at least 43 billion pounds (US$65bn) over current spending in the next three years. Some speculate that the real spending increase could reach 100 billion pounds (US$150bn) by 2004. Health and education spending is budgeted to expand by over 9% annually, while transportation spending is due to grow by over 23% annually. Announced after Blair’s popularity had ebbed in the polls, the budget was seen by many as a gambit to buy future votes. The general idea is, “for whatever ails you, dear voter, the government can make the problem go away by spending more of your money on it.”
At last measure in England, total government “managed” spending represented 37.7% of GDP; the new budget would increase this to 40.5% by 2003. The new message from England’s Labor party is pretty simple: the era of fiscal restraint is over, and the government is going to get more involved in people’s lives.
In sharp contrast, Germany’s leftist coalition produced a far more welcome policy announcement. The German parliament’s upper house affirmed President Gerhard Schroeder’s earlier proposals and passed a 50 billion mark ($24 billion) package of broad tax cuts for both corporations and individuals over several years. Federal corporate taxes will decline from 40% to 25%, and the capital gains taxes on corporate divestitures will be eliminated in 2002.
These German tax cuts could very well invigorate the country’s economy by stimulating restructuring and luring new investment. German corporations’ famously stultifying cross-holdings structures can be unwound tax free, a particular boon for its banking and insurance industries. Businesses will also have a greater incentive to take risks and expand production within Germany. This clearly suggests that the government is looking to play a smaller role in the economy, removing barriers to trade and economic growth.
One must remain cautious when forecasting policy moves made by “third way” politicians. By its very nature, the “third way” cannot overcome the contradictions of pro-market and pro-socialist policies. Having no fixed convictions to guide decisions, policies tend to be driven by polls and changing economic conditions. Though its recent actions appear promising, German politicians must follow its tax cut with further reforms. The Laffer curve is real, but Germany’s government cannot hope to get taxes down to truly appropriate levels without corresponding cuts to its massive budget. And it’s difficult to believe a loose leftist coalition can deliver such policies. In England, Tony Blair’s move to the left through higher spending illustrates how quickly “third-way reformers” can return to old habits. England may soon illustrate how government spending sprees ultimately lead to insistent calls from the taxman.
It is too soon to tell how these two scenarios will play out, but for the moment it seems that the German version of the “third way” is moving the right way, and the English version, the wrong way.
