Public spending: can this debate get any shallower?
The answer is: yes it can and it just has. Steve Bundred, the head of the Audit Commission, has called today for swingeing cuts across all parts of the public sector including pay while claiming that the only reason politicians won’t commit to a Bundred style austerity programme is because they are running scared of the electorate.
But the article, in which he makes the call, has one gaping hole at its heart – the recession. Nowhere does Bundred even acknowledge let alone analyse the fact that cuts in public services may have a detrimental effect on a very fragile economy which could, in turn, make the state of the public finances even worse. (An issue I have dealt with elsewhere.) This oversight means Bundred, and nearly every other commentator currently calling for cuts, is trying to solve a mathematical problem by completely ignoring one half of the equation.
Thankfully, the saintly Will Hutton brings redemption a few pages on from Bundred’s article in The Observer, by exploring the work of the economist, Richard Koo, who has studied Japan’s long battle with recessionary pressures. Koo, unlike Bundred and others, actually recognises that the public finances and the economy are intimately related. He argues that for the state to start minimising its debt just when businesses across the economy are doing the same will only exacerbate the recession. (A situation which, of course, will only drive up unemployment costs, reduce tax revenues and damage the public finances further.) Koo argues that the state must be extremely bold in its counter-cyclical policies at this stage to lift the economy out of a very dangerous period.
If anyone doubts the wisdom of this, one need only look across the Irish Sea. After two austerity budgets in the midst of a recession, the Irish Government’s tax take is still well behind target and there is no sign of improvement in the public deficit. The result: a further downgrading of the Irish state’s credit rating this week.