To kick off the enquiry, my chart shows the cross-country relationship for the 23 wealthiest OECD nations in the mid-00s. The Gini coefficient measures inequality after taxes and transfers. Data come from the OECD.
Two things stand our here.
First, there is a negative relationship. between public spending and the Gini coefficient. Higher public spending is associated with greater equality. Across the 23 nations, the correlation is 0.5. Sweden and Denmark have low inequality and high public spending. The US has low public spending and high inequality.
Second, this correlation is not very tight; the R-squared is only 21%. Several countries have both higher public spending and greater inequality than Korea or Australia, for example. This could be because some public spending is indeed a bill for failure; if inequality arises from people being too badly educated to find work, spending on welfare and fighting crime might be large.
Also, big variations in public spending exist with similar levels of inequality: France and Switzerland have the same Gini coefficients, but the French government spends 18 percentage points more of GDP.
For me, this introduces a new perspective. For years, the debate slanging match between left and right has been: should the UK move north-west in my chart to Sweden, or south-east to the US?
But this misses something: why can’t we move south-west, to Korea or Australia? How do they achieve both greater equality than us and lower public spending? They show that smaller government and greater equality are feasible. What conditions must exist for this to be the case?*
If the coalition were sincere about wanting “progressive cuts” - which I doubt - it would answer this question before blindly slashing spending.
* It could well be ones that can’t be created except in the very long-term, such as a highly educated population or an ethos of justice.