Despite the chaotic and often corrupt practices of politicians, we would probably agree that democracy has brought great benefits.
These include freedom from tyranny and exploitation by ruling classes with no concern for the welfare of the common citizen, unprecedented prosperity and social benefits which have lifted millions from abject poverty, freedom of speech and religion, fair trials and (mostly) impartial justice.
But can Western democracies continue to have confidence in their governments?
The financial crisis
The financial crisis of 2007-8 and the subsequent severe recession that hit mainly Europe and the US have exposed the financial weaknesses of many countries. Several have had to seek bail-outs from fellow Euro-zone countries, the IMF and others, just to stave off collapse: Ireland, Greece, Portugal and Cyprus, with Spain and Italy struggling to keep out of the same humiliating clutches of international creditors.
When the crisis hit, causing a severe decline in economic activity, governments found their tax revenues plunging and found themselves in a double squeeze of falling tax revenue and escalating spending on welfare payments. This created huge and rising budget deficits that forced governments to borrow from the international capital markets in ever larger quantities. As debts rose, investors became spooked, especially about debt incurred by the weakest countries. As a result, many countries had no choice but to accept painful austerity measures in return for bail-out packages. Citizens of those countries, and even Britain, now face the unpleasant task of raising taxes and cutting spending in order to balance the budgets.
Tax history
While it may seem obvious to those of us in the financial industry, many people don’t understand the link between the benefits they receive from government and the rising debt that we are battling to cut. Before the early 20th century, many people will be surprised to learn that the US did not have an income tax. Britain adopted various temporary income tax schemes in the 19th century, but for the purpose of paying for wars. Before the 20th century, most government expenditure was to pay for defence and police forces, the costs of running the institutions of government like Parliament and the courts. It was financed largely by consumption taxes, tolls and various levies.
Although government programmes to help the poor are documented going back to the Roman Empire, the notion of a social welfare state financed with income taxes is mainly a 20th-century idea. We can point to a number of reasons for this development, ranging from well-meaning liberal governments responding to the abuses of the Industrial Revolution and, later on, the Great Depression, the influence of Maynard Keynes and his idea of using deficit spending (spending more than the government receives in tax revenues) by governments as a means of promoting economic growth, to the more sinister influence of Communism that legitimised the idea in the minds of socialists that governments have the right to ‘redistribute wealth’ from their rich citizens in the name of social justice.
While the original causes can be debated, certainly most Christians will sympathise with the idea of such things as helping the poor. But how has the welfare state fared in the hands of politicians and voters, the majority of whom now no longer embrace Christian values but who are increasingly influenced by postmodern ideas?
Welfare state and government debt
While countries have all gone through periods of rapidly rising debts throughout history, prior to the 20th century such financial emergencies were almost always caused by financing wars. It is only in the 20th century where we find governments dedicating increasing proportions of their budgets to social benefit payments. Initially governments sized these payments according to their available tax revenues, but it wasn’t long before they began an unprecedented wave of new welfare schemes financed by ever increasing income taxes. And when those weren’t enough, governments began borrowing money to make these payments, with seemingly no plan to pay off these debts or even to balance their budgets to stop the debts from increasing.
By the time the crisis hit in 2007, the US and European countries had already allowed their debts to rise to uncomfortable, even stratospheric levels for peacetime economies, ranging from 50% to even 250% of their GDPs (gross domestic product, the total value of economic production in a country). Britain’s debt was around 50% of its GDP in 2007, but, despite austerity measures, our debt has risen to around 80% of GDP in 2013 and is forecast to continue to rise. This is unprecedented for a peacetime economy.
The problem is worse now because, unlike wartime expenses which naturally come to an end when the war is over, welfare schemes have mostly been set up as so-called ‘entitlement programmes’, which means that governments have obligated themselves to pay pensions, national health care and other welfare payments according to need, regardless of whether tax revenues are sufficient to pay for them.
There is a demographic time bomb, especially in Western Europe, with rapidly aging populations forecast to place ever increasing burdens on future generations, where fewer and fewer workers will have to finance greater and greater numbers of longer living retired people with their needs. So already stretched governments with little flexibility or extra reserves face payment obligations pre-programmed to increase, while having to raise taxes at a time of economic recession. This is placing an increasing drag on the economy, fuelling further revenue declines, making the problems much more difficult.
How did we get into this mess?
There is a fatal flaw in Western democracy in a postmodern world. As Western Europeans have moved away from Christian principles, they have also rejected the idea of truth in favour of thoroughgoing relativism. All that matters is my life now. As postmodernism has rejected moral truth, people have turned to a philosophy of self-centredness.
Let’s see how this has undermined the institutions of Western democracy. What started as a sincere effort by politicians of the previous century to use government taxing power to provide social welfare has now morphed into something very ugly:
1. Politicians, in an effort to get re-elected, have over the years cynically promised voters more and more benefits, even when they knew that they couldn’t afford them and would have to borrow to finance them.
2. Voters with no concern for the long-term common good of the country have demanded more benefits from their governments, recasting them as payments to which they are ‘entitled’ rather than understanding that they are dependent on a prosperous economy.
3. As politicians are presented with evidence of increasingly perilous government finances, rather than take the hard decisions to rein in run-away costs, they have contributed further to them by passing more generous payments in an unscrupulous attempt to win votes. In Greece, France and Italy, successive governments have ignored the warning signs that the trajectory of government pension obligations was unsustainable, agreeing to allow people as young as those in their 50s to receive full pensions.
4. Some people with the attitude of ‘what’s in it for me’ see no moral problem in abusing the welfare system. Rather than enter into a debate on how to prevent these cases in order to allocate scarce money to those who really need it, the press and interest groups often shout down the politician who is brave enough to question the status quo.
5. On the other end of the scale, unscrupulous bankers engage in interest rate manipulation to gain trading profits, and greedy business people engage in dishonest practices to maximise profit and lobby susceptible politicians to pass laws that allow them to escape tax obligations on most of their income.
6. Principled politicians find it hard to get elected because voters want to support the politician who promises them more, regardless of the cost.
7. As governments took on more ‘cradle to grave’ responsibility for the social welfare of their populations, they have taken an ever larger share of income from their citizens. Until recently the top rate of tax in some countries had risen to 90%, creating huge incentives for wealthy citizens, also motivated by self-interest, to cheat on their taxes or hide money in offshore accounts.
8. Those who are willing to pay their taxes to support social welfare are dismayed to see politicians fiddling their expenses or, as in Greece, government payrolls swell enormously with phantom patronage jobs granted by politicians as bribes to gain support for election. Thus more citizens become cynical about their politicians and distrustful that government can spend their money wisely, believing instead that most of the money will end up in the pockets of corrupt politicians who stash their money in offshore accounts.
So the self-centredness of the postmodern world puts us in a vicious circle: unprincipled politicians, responding to pressure from voters who look to government to solve their problems, pass benefits the country can’t afford. When financial crisis hits, governments are forced into austerity measures, raising howls of protest from voters who understandably don’t like their benefits taken away or reduced, regardless of whether the money is there to pay for them.
All this, as in the Weimar Republic in Germany in the 1930s, has a destabilising effect on our political process.
Footnotes
Many of the statistics come from http://ukpublicspending.co.uk which seem to tally with other sources. When they say they’ve cut our debt, they mean they’ve cut it from what it would have been without the austerity measures. The top tax rate was in the 90% range in a number of countries. In Britain it was around 90% through the 50s and 60s according to the National Taxpayers Union and other sources.|
Steve Gandy – a senior banking executive in London
This article was first published in the July 2013 issue of Evangelicals Now. For more news, artciles or reviews, subscribe to EN or contact us for more information. http://www.e-n.org.uk 0845 225 0057
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