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.

The ‘battle of the economists’-sound and fury signifying nothing

22 02 2010

It has been said that the politics of academia is the most vicious and bitter form of politics, because the stakes are so low. The phrase comes to mind when considering the exchange of views between different groups of economists this week. First a group of twenty wrote a letter to the Sunday Times arguing that fiscal tightening, or cuts in public spending as it really is, should start sooner rather than later. This was jumped on by the Tories as proof that Labour was threatening the long term credit worthiness of the UK. Then today two groups of economists, headed by lord Skidelsky and Lord Layard, had letters published in the Financial Times refuting the first group. Skidelsky and Layard argued that early fiscal tightening would lead to a plunge back into recession. This argument is interpreted as support for Labour.

The onset of the recession has left the economics profession effectively discredited. The numbers of economists who predicted the recession were so small that they are the stopped clock part of the economics profession. If you predict recession for long enough then you will eventually be right. Neither the free market economists or the neo Keynesians have any remaining intellectual credibility.

This intellectual paralysis has contributed to a situation in which serious global analysis of the causes of the recession has been inadequate. Most discussions have focused on the symptoms of the crisis, such as the credit bubble, rather than the causes. As a result the current position of most economists on recovery is to cross their fingers and hope for the best.

The current ‘controversy’ over fiscal tightening revolves in effect around whether the small cuts now proposed by the Tories for the next financial year, around £2 billion-a lot of money for you and me but a drop in the ocean for the UK economy, should go ahead or not. That this relatively tiny amount should be so controversial indicates how limited the debate about the UK economy really is. What is even worse is that the wider discussion of the future has been boiled down to how far and how fast public spending should be cut.

In reality all the participants in this discussion know that even if it was desitrable that large cuts in public spending should take place over the next year or two it is not a realistic option. It would require a huge effort of political will of which there is no evidence that it exists. Everybody understands that it ios only the massive supprt given to the economy through support for the banks and through pubblic spending which is keeping the UK economy afloat.

The main underlying worry in all of this is that there is no plan to get the UK economy back to growth. As the Financial Times commented on the spat between economists, there is no alternative to continued state support for the economy. It argued that major cuts now, which nobody is suggesting anyway, would lead to a further contraction of the economy,

It is not clear what forces could offset such a contraction. Easier monetary policy would be of limited use: domestic credit growth is not a route to sustainable recovery and exports are unreliable. At a time when most of the world wants to export its way out of trouble, who is going to buy all those British goods?

In other words the only option on the horizon is to wait for help from the world economy, which is essentially ‘unreliable’.

The dispute between economists is significant only because of its insignificance. The identification of  one side with Labour and the other with the Tories shows just how narrow the differences between the parties are on the central question of the economy.

A version of this article also appeared on Spiked