What cowboy put this fiscal deficit in?

9 06 2010

That Cameron and Osborne should blame the previous administration for the mess they have inherited is hardly a surprise. It should also not be a shock that Cameron is painting the future as black. He then has the dual advantage that if things turn out badly he can say he told us so and if they do not he can claim the credit for turning the economy round.

What is more interesting is that beneath the rhetoric there does seem to be a genuine belief that the state in Britain should be smaller and have less role to play in all aspects of life. In this respect Cameron has been aided by the addition to his ranks of a section of the Liberal Democrats who believe in the free market. Clegg, Cable, Huhne and the (now departed) Laws were the four LibDems appointed as ministers in the cabinet. All of them contributed to the ‘Orange Book’ in 2004 which espoused the free market as a solution to the problems of the economy and which provoked controversy within the LibDems.

Having come late to the free market philosophy, and at a time when most other politicians and economists were moving away from it, they have some of the fervour of  the convert. Cable in particular, whose formative experiences were in the 1970s when the UK government failed abysmally to prop up failing businesses such as British Leyland, is possessed of a fierce belief that the state has only a limited role to play in the economy. He has promised to overturn Mandelson’s nascent attempts at reviving an industrial policy for the UK.

So now the government has both pragmatic and quasi-ideological reasons for cutting public spending and reducing the size of the state. Pragmatic in order to avoid a collapse of the confidence in those lending money to the UK and quasi-ideological through the concept of the ‘big society’ rather than the ‘big state’.

The problem with this approach is that it flies in the face of the history of capitalism over the past 100 years. The role of the state, in every developed and developing country in the world, has come to play a bigger and bigger role as time has gone by. Outside of the aftermath of wartime no state of any consequence has succeed in cutting public spending absolutely. Certainly no state has managed to do so after a recession. Even under Thatcher, in the supposed brutal period of the 80s, public spending overall continued to rise.

Why is this? Essentially because the free market has proved incapable of fulfilling many different and essential functions of society. No modern state for example has ever had an education system which is run as a private business. No modern state has had an entirely private health system. Even in the US, which is most committed to the free market, state funding of Medicaid is an essential part of health provision. In addition, individual national insurance schemes have never been able to pay entirely for payments to the unemployed.

Private businesses depend  on the state to provide cheap education, health care and unemployment benefits. To some extent the role of the class struggle in earlier periods was important in establishing the levels of provision of benefits from the state, but the elite as a whole understood that the state needed to subsidise welfare in order for the economy to function effectively. It was not the post war Labour government, for example, which architected the welfare state in the UK but the National Government under the Conservative Churchill which did so through the production of the Beveridge report in 1942.

The state has also had a key role in the building and maintenance of transport and other key infrastructural projects, which are too big for any individual private company to develop but which all businesses benefit from. Roads are one good example of this, but virtually all communication systems and infrastructure projects require massive state involvement and investment in their production or maintenance.

It is also the case that the state is now so large and so intertwined with private business that many companies depend on government contracts. The IT business in the UK, for example, has benefited over the past twenty years from many large projects in the NHS and in other government departments.

There are those who argue that it is the increasing role of the state which has stifled private enterprise, but the reality is that without ever-increasing state involvement modern economies could not survive. Capitalism is too feeble and unproductive in most modern economies to operate on its own two feet without massive state assistance.

 So what does this mean for the present UK government’s plans to cut spending? Firstly they will struggle to make any impact on the overall scale of public spending without doing huge damage to the way our society works. Secondly, whatever their pretensions to the opposite, the axe will fall hardest on those least able to defend themselves.

A version of this article appeared on Spiked

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2 responses

11 06 2010
f0ul

An interesting article which ignores the facts which prove your points wrong! 😉

During the Victorian years, it was the unions who paid the unemployment benefits and it was charity which managed the education and the medical needs of the UK – and it worked. Back in the middle ages it was the local monastery which played the role of benefits agency – it isn’t a new idea!
It only stopped working when the government decided that it wanted to have more of a role in the system. This was the disincentive for the charities to develop the charitable hospitals that they were running – although the devastating effect of the 2 world wars had on expertise and the availability of staff didn’t help!
What you don’t seem to acknowledge in your article is that government initially takes an interest in the workings of the market when it is usually in a self correcting cycle. During this time, it puts measures place to avoid the self correcting mechanism from working again, and the result is a different form of self correcting at a later date. This time the government blames ‘market failure’ rather than its actions years previously. Obviously it introduces new measures to prevent this new self correcting mechanism from happening again and the cycle continues!
For instance, we can see the recent recession is actually the outcome of measures put in place after the 1929 crash – combined with a number of different government measures over 80 years to create a massive self correction. The problem is that the self correction has not been able to act its way through the system – the end result being an even bigger crash is due to us in the mid 2020’s!
You are right that you can’t now just remove government from this mess. However, if they removed their meddling as they removed themselves over the next few years, it should be possible to have a much smaller government that works.

The problem is that there are too many lazy companies out there who rely on backroom deals to ensure they too can be a part of the gravy train (and the government’s record with the IT industry is a great example)
Anyway – having discovered your blog, I will continue reading and see if your opinions are open to change! 😉

23 06 2010
Osborne’s cuts, neither unavoidable or achievable « UK After The Recession

[…] of  what Osborne, with his Liberal free market colleagues, is doing is based on a  belief in a small state rather than through any financial imperative. Matthew Parris, for example, writing in the Times […]

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