If national prosperity could be explained by a single economic policy, governments would presumably have discovered the formula long ago. They haven’t, and perhaps one reason is that we spend too much time looking for one.
Denmark, Switzerland, Singapore, and the United States are all wealthy countries, but they don’t share much in common politically or economically. Denmark combines relatively high taxes and extensive public services with a successful private sector. Switzerland has lower taxes and a rather different relationship between government and business. Singapore is famously business-friendly while the state remains deeply involved in housing, infrastructure and long-term economic planning. The United States has a less comprehensive welfare system than much of Europe but remains extraordinarily good at creating companies, attracting capital and turning new technology into businesses.
The problem with these comparisons is that you can use them to support almost any political argument. Denmark demonstrates that relatively high taxation doesn’t necessarily prevent prosperity. Switzerland and Singapore can make the case for competitive taxes and a business-friendly environment, while the United States provides plenty of evidence for the benefits of entrepreneurship and access to capital.
So, I suspect tax is only part of the answer. What interests me more is what sits underneath all of this. Successful countries somehow have to maintain an economy that generates enough value to support everything else they want to do. Businesses need to invest, enough people need to be working, and, over time, they need to become more productive. Without that, less money is eventually available for everything else.
Housing is a good example of how quickly apparently separate issues become connected. We don’t normally think of housing as a productivity issue, but if somebody can’t afford to live anywhere near the jobs, it becomes one. The same applies to childcare. If returning to work costs almost as much as somebody earns, we shouldn’t be particularly surprised when they decide not to return. Poor health can keep somebody out of work altogether. Suddenly quite a lot of what we tend to classify as social policy starts to have an economic consequence as well.
This matters more as populations get older. The OECD expects the working-age population across its member countries to decline over the coming decades while the proportion of older people rises. In simple terms, that means fewer working-age people relative to the number drawing pensions and likely to require more healthcare and social care. It doesn’t necessarily mean economic decline, but the maths gets harder.
There are only so many ways around that. We can get more people into work, work for longer, bring in workers from elsewhere or become more productive. Most developed countries will probably end up doing some of each.
The Nordic countries are interesting in this respect because they are sometimes used as straightforward evidence that high taxes work. Denmark and Sweden certainly show that high taxes can coexist with prosperous, competitive economies, but that doesn’t mean the taxes are responsible for the prosperity. Both countries also have highly educated populations and high employment rates, and they have invested heavily in many of the things that make it easier for people to work. Perhaps that is the more useful lesson. High levels of public spending are easier to sustain when you have a productive economy and a large proportion of the population in work.
Switzerland and Singapore have made different choices, but both have also done a good job of developing skills and attracting investment. There clearly isn’t a prescribed balance between government and the private sector that every country has to follow.
Which leaves me increasingly interested in workforce participation. I don’t think it is some magic economic indicator. Part of the reason wealthy countries can achieve high participation is that they can afford the healthcare, education, childcare and transport that help people stay in work in the first place. But even allowing for that, having more people working clearly matters. If participation starts falling as the population ages, fewer people support greater public expenditure. Governments need more revenue for pensions, healthcare, and other services while the proportion of the population generating that revenue shrinks.
The obvious response is to raise taxes, and governments probably will. The difficulty is knowing when that starts to change behaviour. Businesses can invest elsewhere. Entrepreneurs can move. Some people may decide an additional day of work simply isn’t worth it. Capital is mobile and generally goes where it believes it will get the best return.
That doesn’t make lower taxes the answer either. Cutting taxes while productivity is poor, infrastructure is inadequate or large numbers of working-age people are outside the workforce doesn’t strike me as much of an economic strategy.
Maybe this is why so much of the political argument around the economy feels slightly unsatisfactory. We argue about tax rates, spending commitments, and individual policies, when underneath it all sits the same fairly basic requirement: an economy has to produce enough to pay for the choices we make.
A country with a productive economy, plenty of people in work and businesses willing to invest has choices. It can decide to tax more and provide more public services, or tax less and leave more of that money in private hands. Those are ultimately political choices.
The problem comes when the productive base starts to weaken because the choices start disappearing. You can still promise more public spending or lower taxes, but eventually somebody has to pay for it. Perhaps that is the economic tipping point worth worrying about.
