Policy instruments - taxation, spending and regulation

Does the choice of Policy instruments (taxation; spending and regulation) involve both the "means" and "ends" of policy development? Discuss.

Governments have at their disposal a selection of instruments with which they can implement their policies. Amongst them, are the policy instruments of taxation, spending and regulation, mentioned in this essay title. I intend in this paper to discuss the various policy instruments, their pros and cons, the central concepts of ‘means’ and ‘ends’, and then examine the competing rationales for policy instrument choice. I expect then to be in a situation to be able to conclude with an example of government policy that uses the variety of policy instruments available in an effort to achieve its ends.

There exists a continuum of governing instruments with varying degrees of legitimate concern at the hands of government. At one end are extortion and persuasion, with the instruments of spending, taxation, regulation in that order leading the maximum degree, that of state ownership or nationalisation. Within the scale there also exists a classification of the various instruments available within the framework of voluntary instruments, such as family and community, then mixed instruments which include provision of information and taxation, and at the top end, where the level of state involvement is highest, compulsory instruments such as regulation and direct provision. Lester Salamon and Michael Lund suggest, quite rightly, that the different instruments involve varying degrees of effectiveness, efficiency, equity, legitimacy and partisan support, which affect their appropriateness for a particular situation.

Spending as a policy instrument refers to all forms of financial transfer to individuals, firms and organisations from governments or from other individuals, firms, or organisations under governments’ direction. The purpose is to financially reward a desired activity, or to encourage a programme which supports government policy; subsidies and grants for medical research for example, or even as an instrument used directly to promote government policy as we shall see in the case study.

Expenditure offers numerous advantages as a policy instrument. It can be used by governments as an incentive to the target group to carry out a particular action which although it may have seen as desirable could not have achieved for various reasons. It is a flexible instrument to administer because the individual participants can decide for themselves how to respond in light of changing circumstances. Consequently, by allowing them to devise their own appropriate response, subsidies may encourage innovation. A final observation is that the costs of administration may be lower as the onus is on the potential recipient to claim the benefits available.

Disadvantages of this policy instrument include the fact that, quite obviously, they need financing, which must come from new or existing sources of revenues, and secondly, the cost benefit ratio may be unacceptably high. Finally, since spending works indirectly, there is often a time-lag before the desired effects are discernable, so making them an inappropriate instrument at a time of crisis. This suggests that a solution to the current crisis in the NHS is not throwing money at it, but rather using other policy instruments such as regulation along with reform.

A tax is a legally prescribed compulsory payment to government by a person or firm. The main purpose of tax is normally to raise revenues for the government’s financing of expenditures. However, it can also be used as a policy instrument to induce a desired behaviour or discourage an undesirable behaviour. An example of this will be mentioned in the case study later in this essay. They can take a variety of forms, such as direct or indirect, and or manners in which they are put into effect.

The main advantages of taxes as a policy instrument are that, firstly, they are easy to establish as they enable individuals and firms to find alternatives to paying charges in order to reduce costs, secondly, they provide a continuing financial incentive to reduce undesirable activities, thirdly, they promote innovation by encouraging firms to search for cheaper alternatives, and finally, they are desirable on administrative grounds as the responsibility is on individuals and firms, reducing the need for the bureaucratic machinery to enforce them.

Inevitably, using taxation as a policy instrument has some drawbacks. They require a vast amount of information to set the correct level of taxes to obtain desired behaviour, and during the process of experimentation to arrive at the correct level, resources are likely to be misallocated. Like spending, taxation is ineffectual in times of crises when an urgent response is required, and finally, they often involve burdensome administration costs.

The final major policy instrument is regulation, which is a rule of behaviour backed up by the sanction of the state. A more comprehensive definition is offered by Michael Reagan, which defines it as a ‘process or activity in which government requires or proscribes certain activities or behaviour on the part of individuals and institutions mostly private but sometimes public, and does so through a continuing administrative process, generally through specially designated regulatory agencies’.

The natures of regulation vary depending on whether they are economic or social. The former control prices, production, investment or entry and exit of firms from an industry, whereas the latter refer to controls in matters of health and safety and social practices such as discrimination in various areas of employment. A couple of benefits of regulation as a policy instrument include the increased efficiency in administrative terms, as they can be put in place without having to deal with the uncertainties involved in the use of less direct instruments, regulations are also politically appealing if the public wants to see a quick and definite action on the part of the government, and finally they can be much less costly than other instruments such as subsidies or tax incentives. Regulations though do have disadvantages, such as having a tendency to distort voluntary or private sector activities so causing economic inefficiencies, inhibiting technological progress and innovation, and they are also often inflexible so not permitting the consideration of individual circumstances resulting in decisions unintended by the regulation. A final major disadvantage is that the cost of enforcement may be high because costs of information, investigation and prosecution can make policy-making unnecessarily legalistic and unfavourable.

Policy instruments such as those mentioned above are what we call the ‘means’. By this, I mean a variety of processes from various ideological or political bases which provide a method of achieving the ‘ends’. Within policy making there is often agreement on the ends of policy, i.e., what should be achieved, but the conflict occurs in choosing the method with which that ‘end’ is reached. For example, a government or council wishing to reduce crime in a local community will be faced with a variety of options in its attempt to achieve the particular policy aim. It may decide to spend, and invest in more police on the streets; alternatively, it could encourage the creation of neighbourhood watch schemes, a voluntary instrument, or use a regulatory instrument, such as forcing the community to install burglar alarms. Logic suggests that each of these policy means should go some way to achieving the agreed ends, but the debate surrounds the means, as for example, costs could be incurred by the authorities, diverting funds from another needy cause, or leading to taxation, or it could force individuals to cover the burden of the costs in the case of compulsory burglar alarms.

The instrument choice approach to policy implementation begins from the observation that, to a great extent, policy implementation involves applying one or more of the basic techniques of government, namely, policy instruments, to policy problems. There exists two different groups of scholars who have developed theories on the question of instrument choice. The first, dominated by economists have tended to interpret the choice of policy instrument as, a merely a technical exercise of matching the specific tools to the job in hand. In the other court exist the political scientists led by our dear acquaintance Bruce Doern, who have tended to argue that any instruments can be used, on a purely technical basis and that the dominant feature that determines the instrument selection are the political forces. They argue that in a liberal democratic society governments prefer to use less coercive instruments and only ‘move up the scale’ to overcome societal resistance to effective regulation. There are though problems with this theory, as in the vast majority of circumstances, the whole range of policy instruments are not available to governments, so constraining the choice of some instruments, secondly, the conception of gradual movement up and down the scale does not conform to empirical evidence, and thirdly the although valid notion that social resistance provokes movement up the scale, is problematic. Governments may be constrained by fiscal, ideological or political reasons which prevent a movement which the theory would suggest imminent.

The case study which involves all the policy instruments, or ‘means’, discussed in the quest for the ‘end’ is that of government policy towards smoking. It is agreed, certainly in the United Kingdom, across the political spectrum that smoking is harmful, and that the health of the nation would be much improved if smoking was eliminated. A decision to ban smoking outright would be politically unacceptable, and so governments use a variety of policy instruments in an attempt to achieve the goal of reducing the number of smokers. Taxation as a policy instrument features highly, for two reasons. It high price is intended to discourage smokers, often unsuccessfully due to the addictive nature of tobacco, and its inelasticity creates an opportune source of revenue. Governments use information as a policy instrument to discourage smoking too; advertising, making information about the risks involved in smoking are responsibilities of government, at some expense. There has been some success in regulation of tobacco advertising, with advertising prohibited near schools and in most sports. All this is evidence that the variety of policy instruments available to the authorities have been used as ‘means’ to achieve the ultimate goal or ‘end’ in this particular policy development.

In conclusion, the choice of policy instruments such as taxation, spending and regulation do involve both the ‘means’, the way in which a policy aim is achieved, and the ‘ends’ the ultimate goal as different policy instruments will achieve the objective with varying costs or benefits en route, such as political support, so crucial to governments who to all intents and purposes, only seek re-election.