From the TUC

The depressing debate on public spending

25 Jun 2009, by in Economics

The sun might be streaming through the office windows, but it doesn’t take much time spent reading newspapers or browsing on-line to darken my mood at the moment. What could have been a progressive moment looks as if it may be passing.

Big bonuses are back, the Guardian tells us. The dominant economic problem is not rising unemployment, but excessive public spending – or so everyone seems to think.  Mervyn King joins the call for spending cuts in what many are seeing as an attack on a government that is already committed to an extremely tight public spending round. Ministers have got into difficulties explaining their plans.

Yet just a few months ago, the world financial system came perilously close to collapse.  It was clear that the dominant economic ideas of the last few decades no longer worked.

Elsewhere lessons are being learnt. President Obama continues his progressive agenda. Centre-right parties did well in the rest of Europe because they were able to distance themselves during the European elections from the anglo-saxon model that tested itself almost to self-destruction. President Sarkozy’s views on burkas may have had most attention in the UK press this week but the FT reports:

Nicolas Sarkozy, French president, yesterday ruled out austerity measures to sort out France’s rapidly deteriorating public finances as he outlined plans to put saving jobs ahead of economic reform and fiscal restraint.

In a historic address to a joint session of parliament at the Palace of Versailles – the first such occasion for more than 130 years – Mr Sarkozy underscored his determination to increase borrowing to soften the blow from the economic crisis, proposing a new public bond to pay for unspecified “priority” investments.

But it ain’t happening here. What is particularly depressing is that such has been the neglect of economic issues by progressives in the UK (with of course some exceptions) that the right is setting the terms of popular debate about economic policy. We all laughed at Fukuyama’s idea that we had come to the end of history; but there has been a widespread assumption in the UK that we had come to the end of economic history with unhelpful phrases such as an “end to boom and bust.”  Too many people seem to have lost the language and instincts needed to deal with the sudden shifts caused by the crash.

Take public spending. Of course we have a deficit. We are in the middle of a recession. The costs of benefits rise when people are thrown on the dole and tax income falls as companies earn less, people spend less and the unemployed stop paying income tax.

Trying to reduce the deficit in the middle of the recession by cutting spending is likely to be counter-productive as it may further depress the economy. The right thing to do is to increase spending in the short-term to boost the growth that will generate the tax income that will allow the deficit to subside. National economies are not like the household purse.

That specific counter-cyclical spending won’t be needed when the economy recovers – nor will benefits be so expensive. But it cannot be rushed.

But while the national deficit and surplus will go up and down as the economy grows or shrinks, there is the longer term issue of whether the UK is running a structural deficit – in other words over enough time to average out the effects of the recession is there sufficient income to pay for public spending?

Much commentary confuses these two issues. While dealing with a structural deficit in the middle of a recession will be damaging, if one exists it cannot be put off for ever.

But this is where we are missing real political debate. Do we have a structural deficit? If so, what size is it? How quickly should you deal with it? Do you cut spending or raise taxes (or both)? If you cut, where does the axe fall? If you tax, who pays?

All of these are serious questions, yet all that’s up for discussion is what to cut and how quickly can we do it?

5 Responses to The depressing debate on public spending

  1. Charlie Marks
    Jun 26th 2009, 2:45 am

    Putting forward arguments for increased public spending aren’t easy – especially since the main proponent is a discredited Prime Minister who actually plans cuts just as we are coming out of recession in the next few years (if we are, and I doubt it).

    I expect that there will be another round of bailouts as the crisis worsens.

  2. Jackart
    Jun 26th 2009, 4:28 pm

    Yes. We do have a structural deficit. And you know it. (or you’re too stupid to breathe) We are running a criminal deficit, and we were before the crash. By ‘we’ I mean the bunch of incompetent Labour scum you’re shilling for. Obviously I voted for the other lot.

    I can’t wait to see Labour’s diversity outreach coordinators on the dole, where they cost me less.

  3. ad
    Jun 27th 2009, 6:04 pm

    But while the national deficit and surplus will go up and down

    I am told that it will take a quarter of a century to pay off the debt, and get back to where we were in 1997.

    Some people now entering the workforce will have grandchildren before they have paid off this debt.

    Think about that.

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