Why should anybody oppose public spending cuts, and how?

18 05 2010

Naturally, nobody welcomes having services they benefit from taken away. The bulk of public spending, about 63% of the total, goes on health, education, pensions and social security. Everybody at some time in their lives will benefit from these services. The problem is that the current  level of government spending can only be sustained either by borrowing more money or increasing taxation.

The government, and most economists, believe that borrowing more money would push the country even deeper in debt, which would worry  those who lend us the money so much that interest rates would soar. Eventually, according to this argument, the loans would dry up and we would be faced with default and have to be bailed out, like Greece, leading to even deeper cuts. While we await the specific details of the new government’s plans to tackle this problem it looks inevitable that it will involve a mixture of higher taxes and some cuts in public spending. (For a full treatment of the background to this approach see Sean Collins)

Given the way that financial markets work, looked at in this way it is quite a plausible scenario. So how should we think about what will be in effect an austerity budget that George Osborne , the Chancellor of the Exchequer, will be producing in  a few weeks time? We could all simply take the view that we do not want our public services to be reduced at all.  It would certainly be a good thing if there was a more general opposition to austerity measures,  to any attempt to take this country backwards in terms of the quality of life.

However, in the absence of an intellectual case against the cuts, any such anti-cuts campaign will almost inevitably take the form of special case arguments, as has happened many times in the past. This can take many forms. A popular one is that management should be cut, not ‘shop floor’ workers. Another is that this or that other part of the state, usually defence or the civil service, should take the brunt of the cuts, rather than health, education or welfare. This approach does not oppose public spending cuts per se, but tries to divert them elsewhere. However this pans out, the result is job losses somewhere along the line and a net increase in human misery.

So is it possible, or even desirable,in the light of the undoubted economic problems facing this country, to make a case against public spending cuts per se?  Before we begin to answer this it is important to grasp one vital truth about public spending. All of it is financed out of the proceeds from private business, whether  industry or services,  through corporate or individual taxation. If these parts of the economy are struggling, as they are today, then the proceeds from taxation will stagnate. The current severe deficit problem was created because tax revenues fell in the past few years, not because public spending rose. While increased borrowing can make up for this increased deficit for a while, eventually the borrowing becomes too much and we are back in the Greece scenario.

So the real question about defending public spending is how to regenerate and revitalise the productive parts of the economy to the point where increased revenue from taxation, and therefore more public spending money, becomes plausible. That is why the most effective way of opposing public spending cuts is to argue for policies which encourage faster economic growth. Here is where we begin to part company with the government concensus about austerity. A key element of pursuing faster economic growth is for the state to invest more public money in science and technology education, in the encouragement of research and innovation and  in new infrastructure. This approach would involve some reorganisation and reprioritisation of public spending, away from consumption and towards investment.

Most importantly, the government must generate enthusiasm for a more dynamic economy and society. This would mean challenging the risk averse, pessimistic and therapeutic aspects of British culture. It would mean rejecting the view that economic growth should be green and sustainable, all code words for slow. It would mean restoring the pursuit of excellence as a goal of society and it would aim to bring out the best in people.

Innovation and inspiration-part 2

2 02 2010

During today’s economic downturn, innovation will be more important than ever. The sooner far-sighted strategies are developed and implemented by government, business and other agencies, the more a better world will be within humanity’s reach. It is not innovation that creates inequality, but the social choices of institutions. We distinguish innovation from fiscal, regulatory, legal and cap-and-trade responses to today’s challenges. Unlike these technocratic measures, innovation has the potential, at least, to increase wealth and opportunity for everyone: it is not a zero-sum game. Big Potatoes: The London Manifesto for Innovation


This blog has long argued that the UK requires a radical change for the better in its approach to innovation. I am delighted to recommend a new report, Big Potatoes: the London Manifesto for Innovation,which you can register for here, which proposes a 14 point programme for innovation.

What next for UK banking? Not learning from the past apparently

15 12 2009

uk after the recessionI was at this event yesterday jointly organised by the New Statesman and Barclays Bank and addressed by representatives by the three main political parties. John Varley, the Chief Executive of Barclays Bank, began by arguing that banks should adopt more social responsibility, by which I think he means not to get into the same mess as last year again.

Two things struck me from the discussion. The first is that there is hardly a cigarette paper’s difference between the three parties on the issue of banks or by implication in their understanding of the recession. They all supported the populist tax on bonuses (described privately to me by one senior banker there as ‘puerile’). They all agree that there should be more competition in banking, better management of risk  and better regulation. One wonders yet again why there are three parties when there are virtually no policy differences between them. The cosy atmosphere was upset only marginally by John Snow asking why no bankers were in jail yet.

The second problem is that in this discussion, supposedly about the future of banking, there was disappointingly no discussion about the role that banks could be playing in the regeneration of the UK economy.  The whole discussion was about  not repeating the mistakes of the past rather than tackling the problems of the future. Lord Myners, Labour’s  Financial Services Secretary to the Treasury, mentioned in passing that there no longer appeared to be a blockage in banks financing business, although the cost of credit was perhaps too high. The banks say that there is less demand for credit from business. If there is little demand for credit this should warn us that the economy is unlikely to see a fast recovery from the recession.

The main lessons from the recession appear to be passing the parties by. The financial bubble, as I have argued before, was not the product of too much risk taking but too much risk aversion. Investors were seeking ways of making money through apparently safe new financial ‘products’ rather than through investment in apparently riskier new industries and new technologies.

The government now effectively controls two of the major banks in the UK. It would be a good idea if it could enter into some major planning exercise to encourage investment from these banks in the kind of infrastructural projects that the UK desperately needs. It would also be a good idea to encourage these banks to set more investment aside for innovation and those areas of the UK economy which have the most promise.

None of the parties is facing up to the real problem facing the UK economy, what is going to be the engine of growth if financial services does not recover its dynamism, a prospect which appears to be receding all the time. Banks have a role in solving this problem, but the leadership has to come from politicians and there is precious little sign of that at the moment.

What future for business? Risk taking and innovation after the recession

8 07 2009


Whenever there is a panic in society, for example around swine flu, I usually find myself on the side of those saying ‘calm down, its not as bad as you think’. I generally take the view that as a society we are too risk averse and liable to panic. However, as far as the recession has been concerned the opposite is the case.  The recession now appears to have been a bad dream about greedy bankers and corrupt politicians from which we are awaking. The concensus appears to be to forget about it as quickly as possible and get back to business as usual. I feel like Cassandra, condemned to tell the truth but to be disbelieved, because there is no ‘business as usual’ and here are three reasons why.

The first is that the damage done by the recession is deep and likely to be prolonged. I say the damage done by the recession rather than the recession itself because technically the recession, defined as consecutive quarters of nagative growth, may be over or almost over, but the damage will linger on:

  1. Unemployment is continuing to rise
  2. Toxic debt has not been removed from the system
  3.  Banks are not lending
  4. The securitization business, provider of investment finance, has disappeared
  5. World trade has collapsed
  6. Global capital flows have slowed dramatically

Secondly, for the UK there is no business as usual for three main reasons. For the past ten years financial services have been the main driver or the economy. there is very little chance that this will return. Also the crisis in public sector finance, affected badly by the reduction of taxation from the finacial services sector and the costs of propping up the banks, will mean big challenges for the public sector in terms of employment and services. Lastly our political class has run out of ideas and lost a large amount of authority. This will make any hard choices difficult for it to take.

Thirdly, real change in the economy will require inevitably some risk taking and more innovation. Yet even before the recession the UK had the lowest Research and Development and Venture Capital investment in the developed world. The recession, according to the Future Foundation, has made business even more risk averse.

We are culturally a safety first society. We view new developments in science and technology with suspicion and hostility. We are over protective to an absurd degree of our children and ourselves. Is it possible to imagine that this kind of attitude will foster and encourage a dynamic econopmy?

Take the banking crisis. We have capitalism which cannot stand on its own two feet and a state which cannot act decisively. The banks have been protected from their own recklessness by a state too feeble to either force them to face the market or to take complete control. Instead we have a half way house which allows the banks to stop playing their role as providers of credit. Some people see the banking crisis as an example of taking too much risk. But there is a big difference between taking a calculated risk and sheer recklessness and stupidity.  The creation of toxic debt began as an attempt to spread and minimise risk. It became reckless once the people buying the debt stopped checking on what they were buying. This was just plain stupid.

There is not one part of our society , business, politics, culture, which has not become more risk averse. The way to challenge it in the first instance is through politics, something anybody can play a role in. We have to renew our democracy as the prelude and the process of renewing our economy and our society.

Reboot Britain-Innovation requires more than tweeting

7 07 2009

twitter-bird-money-eyesThe Reboot Britain Conference yesterday organised by NESTA had promise, focussed as it was on the need to transform the future of the UK, a project I am very keen on. In particular it was looking at the power of the web to shape better public services. Did it deliver on its promise? I was struck by several things.

Firstly, what people now consider ‘innovation‘ is mainly the ability through social media to communicate with each other more. Social media are now becoming the focus of hope for the future in every area of life. The capacity of social media to really change things is overestimated while the lack of any substantive polices for change is underestimated.

Secondly I heard almost no discussion or even mention of the recession. The tone was relentlessly upbeat and the emphasis was on ‘optimism’. The whole event felt like some kind of strange religious sect which attempts to operate outside of normal reality. There was a strong sense that if only we could convince ourselves that the recession was over then it will be.

Thirdly, politics and politicians are not only held in contempt, but hold themselves in contempt. The Conservative MP Jeremy Hunt, who opened the proceedings, spent a lot of his speech making jokes about corrupt MPS and lauding social media as a way of keeping MPs under control through greater transparency. Any discussion of the content of politics was entirely absent from the day.

Fourthly, even clever economists like Gillian Tett view the causes of the recession in non economic terms. In her case she interprets the behaviour of bankers in organisational terms as being about lack of effective structures.

Lastly, the CEO of NESTA, Jonathan Kestenbaum, has decided that the Tories are going to win the next election. His introduction to Jeremy Hunt was the most effulgent suck-up I have heard for some time.

Innovation and risk

19 06 2009

A new report from the Future Foundation on attitudes to risk and innovation in the business community makes depressing reading. It found that two thirds of the companies canvassed thought that risk aversion would lead to lost opportunities. The report concludes that this is because of,

..a lack of available finance, a lack of confidence in the future economic prospects, a concern that investors are also averse to risk-taking, a desire to follow the example of others and even our inherent British conservatism.

In what is surely a further sign of how enfeebled and conservative British capitalism has become, fewer than half the business leaders said they admired risk-takers and little more than half thought entrepreneurs who took risks should be rewarded. When even the people who are running British capitalism are repulsed by risk taking and wealth creation then we surely are in a bad way. This is a classic example of how the culture of limits, a general sense that economic growth is a bad and dangerous thing, has infused our society at every level.

As James Woudhuysen has argued in his fine contribution to a forthcoming debate on innovation after the recession, this conservatism leads directly to inadequate investment in research and development, which further hinders economic progress. As I will be arguing at this event, the barriers to innovation have to be seen in a political and cultural context, not simply as an economic issue. It may be true that decisions to invest are made by the owners and managers of capital rather than by society in general, that is the nature of capitalism, but it is also clear from this report and others that investment decisions are influenced by  broader social and cultural factors. This is what makes a public debate on the need for more investment and more risk taking so vital and why stronger leadership in the political sphere is also urgent.

It is inherent in the paradox of risk  that caution seems to be a better option in the short run. We are still deep in recession and businessmen, like everybody else, are fearful of what may be round the next corner. It as at times like these that society needs to pull together to strengthen everybody’s resolve and encourage ways of investing and growing our way out of trouble.