David Bell: Nothing is for free in public services

And no services are really free: taxpayers inevitably have to sacrifice so others receive services free at the point of delivery. The size of the sacrifice depends on how much tax they pay. So should we reduce the size of their sacrifice by extending the scope of means-testing, so free services are only available to those that cannot pay?

Decisions about public services are made at different levels of government. Central government, devolved government and local authorities are each involved. Universal benefits may be made available at each level, sometimes in response to political pressure. This means we have a confusing patchwork of universal services. And there is no independent body that judges the overall fairness of these benefits. We do not know how concentrated they are by income group, social class or age.

Once established, universal benefits are regarded as entitlements. And the political difficulties of revoking entitlements are immense, even if tax resources could be used more effectively elsewhere to promote the social good. Once a free universal service is available, it acquires a political base that will strongly resist its removal.

Where it is the purchaser, the state need not also be the provider of services. It can choose to purchase services on behalf its citizens from private or third-sector providers. So long as the market is competitive, this should result in minimum cost provision. Scotland has clung on to state provision to a much larger extent than most other Western countries.

This makes the issue of establishing efficiency much more problematic. It also has a wider range of universal benefits than most other countries, including the other constituent nations of the UK. Many have been introduced or extended since devolution.

The economic case for means testing is strong. By targeting resources where they are most needed, the taxpayer is not subsidising those who could purchase the service anyway. Resources can then be released to other priorities or taxes can be reduced. More targeting also implies that the state interferes less with market provision. This results in less distortion of the private market. For example, where individuals are themselves contributing to costs, they are more likely to argue on their own behalf for quality improvements, something that is unlikely to happen when the argument is being made on behalf of society as a whole.A good example is student tuition. Students who pay are more likely to drive up the quality of teaching.

There are invariably moral hazard problems associated with free services. Where a service is free at the point of delivery, demand will be inflated. Individuals may indulge in risky actions, knowing they will not personally bear the costs of mitigating these.

There is also the issue of fairness across generations. Universal services provided for a particular age group and subsequently withdrawn mean this group has benefited relative to those younger and older than themselves. The average age of a UK taxpayer is around 40. Most recipients of universal services are older. In essence, the 40-year-old is paying for the services older people receive. The notion that we all have paid into a pot from on which we can subsequently withdraw is largely a fantasy.

Each working-age generation subsidises the services received by the young and the old.

This could be part of an equitable intergenerational contract if the 40-year-old receives the same services once he or she is older. But if one age group seems unlikely to receive the services previously available to others, then the principle of fairness between generations is violated which may make working age people less willing to pay their taxes.

When assessing the fairness of universal provision, its impact on fairness between generations is an important consideration.

The arguments against means testing and in favour of universalism are more subtle. The "paradox of redistribution" argument suggests increased means testing widens the social divide between those paying for public services and those receiving them, who come to be regarded as a stigmatised underclass.

Eventually, this weakens political support for redistribution, which only worsens the plight of the poor.

Means testing is expensive. Some will avoid it due to a fear of stigmatisation. There is known to be low take-up of certain benefits, particularly among the elderly. But take-up tends to be higher among those with greater entitlement.

Those who do not claim anticipate, often correctly, that the return to filling in a form will be low. It is also expensive for government. The more the system is fine-tuned to deal with specific types of case, the more complex it becomes. Greater complexity imposes additional costs on both clients and providers and increases the chance of errors.

Another argument against means testing is it deters saving. If saving swells your bank account, you are more likely to be denied free public services. Better to spend nowand get public services free.

Increased means-testing can sometimes lead to an increase in overall spending. For example, taking a holistic view of the Scottish Government's budget, increased charging of individuals for home care services might result in increased hospital admissions.Increased NHS costs might then eliminate any net saving from means testing at local authority level.

The more the Scottish Government pays for one public service, the less is available to fund others. Bob Black, the Auditor General, has estimated that free personal care, free prescriptions, free eye tests and free bus passes will cost around 560 million in 2010-11. This is more than is spent by the Scottish Government on enterprise, energy and tourism, which is a key area for sustaining economic growth.

And the list of services excludes free university tuition, removal of road tolls and of course the largest universal benefit of all - the NHS - which costs around 10 billion.

These services cannot be ignored when considering budget lines that might be pared back. The Independent Budget Review has already urged the Scottish Government to "undertake immediate work to review whether all free or subsidised universal services should be retained in their current form".

But there are no votes in taking away or reducing entitlements.

This perhaps begs the question as to whether politicians' ability to provide these giveaways should be constrained in some way.

The costs of universal benefits could be partially contained by freezing or reducing their value. And the eligibility criteria can be toughened. For example, the age of eligibility for free bus passes could be increased.

There needs to be a real debate in Scotland on the relative merits of spending on universal benefits or on other priorities. It is difficult to make a case for universal benefits as drivers of economic growth - which the Scottish Government claims to be its main objective.

They do not typically improve Scotland's infrastructure or its capital stock, whether physical or human. Instead, they largely subsidise the affluent. Although there may be a long-run social case for their continuation, the short-term priority must be to consider increased means testing as part of the solution to Scotland's budgetary difficulties.

• David Bell is professor of economics at Stirling University

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