Spend less, let the people prosper

Europe should learn from the successful Asian nations and rein in the state sector, argues Chris Patten

These days I am a distant and discreet observer of party conferences. But one phrase from the speeches at Blackpool had a certain resonance for all of us in Hong Kong. It was the suggestion that Britain should aim to become, in effect, the Hong Kong of Europe, offering - if I took the point accurately - an offshore entrepreneurial haven: an open economy throbbing with vitality, invigorated by low taxes, liberated from excessive governmental regulation. All this in sharp contrast to a more bureaucratically burdened, higher taxed, introverted, Continental Europe. If Deng Xiaoping was living in Brussels, he would have had a phrase for it - "one community, two systems".

I find this notion of the symbiotic colonial relationship rather a happy one. Can Britain learn lessons from her last great colony - and apply them to her own long-term advantage?

There is less of a hang-up in most successful Asian countries about the relationship between the individual and the state. Most have pursued economic policies that have been market-driven but, like Hong Kong, have leant heavily on substantial public investment in social equity programmes - health, housing, education. In Hong Kong, we are relaxed about mixing and matching public and private investment for community benefits. Like Deng Xiaoping, we care less about the colour of the cat than about whether it catches mice.

But we assume that free-market cats are likely to do the job best. We must surely in Britain and Europe rededicate ourselves with the fervour of zealots to open markets and free trade. If we want Asian spending power to help to fuel world growth then we've got to make room in our department stores and our showrooms for the things that Asia makes, and get Asia to open its markets, too. The billionaire protectionists in America and Europe should get short shrift.

And I take it as read that the electorates of Europe want faster economic growth. We have seen in the past few years that nothing gets better without it, and that since ties of community are strained by its absence, it is worth at least challenging the assumption that any more radical efforts to revitalise our economies would inevitably require policies that tear communities apart. They tear apart anyway.

What is the issue around which I tiptoe so delicately? It is quite simply the appetite of states; it is the proportion of every community's income that is taken in taxes and public spending. In Hong Kong this year we will spend 16.2 per cent of our GDP on public expenditure, and take 11.6 per cent in taxes.

You find similar spending figures elsewhere in the region: in Korea about 18 per cent; in Taiwan almost 16 per cent; in Thailand about 15 per cent; in Singapore about 20 per cent; in Malaysia a whopping 25 per cent. Admittedly it is hard to compare like with like. But the picture is broadly the same. Relatively lower levels of public spending as a proportion of GDP are a hallmark of these booming Asian economies.

What is the position in Europe? In Britain, nearly 43 per cent of our GDP goes on public expenditure. In France the figure is almost 55 per cent; in Germany - where Chancellor Kohl recently advocated slimming down the state sector - the figure is 49 per cent.

I use these figures only to illustrate a more general proposition. Lower proportions of public expenditure are without doubt a consequence in part of less advanced stages of economic development. In Japan, for example, the figures are much closer to those in Europe and North America.

The figures in Asia may edge up as the appetite of electorates for public provision grows - though in Hong Kong, while we have had substantial increases in spending on social welfare, the proportion of GDP devoted to public expenditure is likely to be lower in 1997 than it was in 1982- 83. All these comparisons require a health warning with flashing neon lights, and I do not pretend that Hong Kong's level of public spending as a proportion of GDP is a realistic target for OECD countries.

So I am not an advocate of a slash-and-burn approach to public spending. But my three years in the fastest-growing region in the world, in one of the fastest-growing economies in the world, have impressed on me that some reduction in the state's take of national income is an essential condition for more rapid growth as well as, of course, for lower taxes, which themselves help to spur growth. And I find it hard to accept that existing public, taxpayer-funded provision is so pluperfect that it cannot be snipped, pruned or in some cases dismantled.

Hong Kong is not demonstratively worse off with proportionately much lower public spending than equivalent economies in Europe. But it has long had an iron rule that public spending should not grow faster than the trend rate of growth in the economy. As a result, public expenditure has remained below 20 per cent of GDP, taxes have stayed low and Hong Kong's economy has continued to grow healthily. So it has been able to afford increases in public spending to provide decent levels of welfare, health and educational provision.

I hope that I can set these observations quite apart from any current controversies, and apply them to Europe as a whole. They represent an objective, not a costed programme. The scale of the task of curbing public expenditure means that it must be one for the long term. But the long term has to start somewhere. Naturally it would be better if reform and retrenchment in the public sector could be pursued with as broad a base of public and political support as possible. We have to challenge the assumption that there is an umbilical connection between public morality and public spending.

In his brilliant book The World After Communism, Robert Skidelsky concedes that how to make significant cuts in state spending bristles with technical and political difficulties. But, as he goes on to argue, "at root the issue is philosophical. We need to answer two kinds of question. Are the welfare responsibilities which the state has assumed over this century any longer appropriate in privately wealthy societies? And what, in such societies, is the appropriate division of responsibility we would want to see between the individual and the state?"

This is a profoundly liberal issue. Of course, it assumes an end result of lower taxes and an end to envy as the motor of fiscal policy. But I am not advocating the crasser sorts of individualism, in which men and women are regarded as culturally rootless and devoid of a sense of duty and responsibility. Nor am I arguing, as some appear to do, that everything that states do is wrong and that we need an ideological assault on the public service. Far from it. Like Douglas Hurd, I believe strongly in the ethic of public service, and admire the professionalism of Britain's public servants.

But I also see the case for what Skidelsky calls "state repair", both in the European Union and in those fellow European states to the east that should be part of it. In other words, we shall only be able to restore the authority of states by shrinking what they do. They are, today, muscle- bound but weak; ambitious but derided. To do much better, they must do much less.

This is an edited extract from a speech given by the Governor of Hong Kong to the Conservative Political Centre last night.