The Economist February 19th 2022 Britain 29Theshrinkflationstate
S
hrinkflation is abane of the British shopper. For years, pro
ducers have quietly cut product sizes rather than raise prices. A
multipack of Frazzles, a moreish bacon crisp, used to cost £1 ($1.36)
and contain eight bags. Now it contains six. Cadbury’s Creme Eggs
used to come by the halfdozen; now they come in fives. Quality
Street, a chocolate box, weighed 1.2kg in 2009; today, just 650g. A
box of Jaffa Cakes once contained a dozen biscuits; now just ten.
The logic of shrinkflation is that consumers are less likely to
notice it than its alternative: higher prices. For years, the govern
ment has worked on the same principle. Taxpayers paid roughly
the same, but state services withered. Now an era of price hikes in
the form of tax rises has begun. In a nasty combination of inflation
and shrinkflation, voters will be expected to pay more for less.
It will be an awkward shift. Since coming to power in 2010 the
Conservatives have used shrinkflation just as retailers do. In the
early austerity years the state shrank, but its cost did not. As a per
centage of gdp, it fell from a peak after the financial crisis of 46%
of gdp to 39%. Taxes stayed around their historic norm of about
32% of gdp. But citizens received fewer services.
And, as when shoppers fail to notice the missing packet of
Frazzles or couple of Jaffa cakes, voters did not care much at first.
Weekly bin collections became fortnightly or monthly. Oncegen
erous legal aid became miserly; inwork benefits fell; police
solved fewer crimes. But eventually voters—and shoppers—start
to feel perplexed. Was a box of Quality Street always so small? Were
the police always so blasé about fraud? Moreover, shrinkflation
cannot continue indefinitely. Just as people will not buy an empty
packet of Frazzles, taxpayers will not pay for government services
that are not provided at all. Eventually prices must rise—as the
Conservatives are discovering. By 2026 the tax burden will be 36%
of gdp, the highest since the postwar era, under Clement Attlee.
This will cause several problems. The first is one of expecta
tions. Attlee’s government promised a new Jerusalem: voters ac
cepted higher taxes in return for a welfare state. Similarly, when
New Labour governments raised taxes in the 2000s, they provided
more in return. They increased national insurance, a payroll tax,
in order to bring healthcare spending in line with other European
countries. Schools were rebuilt and renovated; rough sleepingplunged; civic art, albeit sometimes of questionable quality, ap
peared in town squares.
Unfortunately, this time higher spending will at best stop
things getting worse. Sajid Javid, the health secretary, admits that
the health and socialcare systems will struggle even after a 2.5
percentagepoint rise in national insurance. “Is that all we get for
£12bn?” asked the Daily Mail, a newspaper that tends to see eyeto
eye with the Tories, when the plan to cut hospital waitinglists was
announced. British voters are often said to want American taxes
and a European welfare state. Instead, they face paying European
taxes for services as skimpy as those in America.
The second hitch is a mismatch between who pays and who
benefits. The extra taxes are intended for services that largely ben
efit older voters. According to the Resolution Foundation, a think
tank, by 2032 an extra £100bn (in today’s prices) will be spent an
nually on health care and pensions. This amounts to the bulk of
the education budget today. By 2024 the nhs will account for 44%
of the state’s daytoday spending, up from about 27% in 2000,
says the Institute for Fiscal Studies, a thinktank. In relative terms,
the rest of the state is shrinking. The British state will increasingly
resemble a healthcare system with nukes.
This is a poor deal for young people. The parts of the state they
rely on, such as inwork benefits, are increasingly flimsy. Yet they
will be paying more for services they do not use. Meanwhile, the
tax system is changing to their detriment. Soon a pensioner with
an annual income of £30,000 will pay a marginal rate of 20%; a 28
yearold graduate on the same salary will face a de facto marginal
rate of 42.25%, once studentloan payments and the nationalin
surance increase are included.
A more expensive state is inevitable. Areas where the state still
promises comprehensive support, such as health and social care
or education, suffer from “Baumol’s cost disease”: they are labour
intensive, and hence become relatively pricier as wages rise to
keep pace with sectors where productivity improves faster. Teach
ers’ salaries may go up, but the number of children each can teach
does not. Demography makes the situation worse. By 2030 there
will be 4.4m over80s, up from 3m at the moment. The state
spends around £20,000 per year on each child of school age, but
about £40,000 per year on each person in their late 80s.Life is like a tub of Quality Street
A bigger state can be paid for in three ways. The first is economic
growth. If that had continued after the financial crisis at the same
pace as before, taxes would bring in about £200bn more annually
than they do now, points out the Resolution Foundation. That is
enough to cover the entire education and defence budgets, with
change left over. Yet neither the Conservatives nor Labour show
much appetite for doing what would be necessary. Policies that
crush growth (such as leaving the eu) proved popular; those that
might boost it (such as planning reform) did not. Too many voters
are unwilling to accept the downsides of growth, such as more
houses spoiling their view. Many may not feel the need. After all,
the state has not shrunk for some.
The second option is a fairer tax system. Assetrich pensioners
could contribute more. Yet higher taxes for older voters are taboo
for the same reason that restraining their benefits would be: pen
sioners vote. But unless the government can convince older voters
to carry a larger share of the tax burden,orfind ways of boosting
growth, it is limited to a third option:cuttingservices further. An
other bout of state shrinkflation looms.nBagehot
The British state will soon cost more, yet provide less