US swallowing their medicine

Why must the public sector pick up the private sector’s mess asks Dave Watson?

With free market madness having brought the world economy to its knees you would have thought the advocates of neo-liberal economics, in particular the privatisation of public services, would be keeping a low profile. Not a bit of it! A steady stream of so called ‘think tanks’ and business leaders in Scotland are calling for more of the same to get us out of recession and repair the damage to public finances. They remind me of the gambling addict who believes that just one more throw of the dice will recover the losses – but never do.

Most recently we had the Chief Executive of the Edinburgh Chamber of Commerce again peddling the myth that the public sector is crowding out the private sector. If only his members could run public services he cried. Fortunately the people of Scotland have consistently said in opinion polls – no thanks! The other line of attack is that public money is wasted. This is pretty rich from the private sector bonus junkies whose greed got us into this mess.

Of course in any organisation there are examples of waste, like PFI or management consultants, but most of the taxpayers’ money goes to help people in need or improve everyone’s quality of life. Public service productivity has been improving consistently since 2003 – for every pound put in, we get more and better services in return. Investing in public services also helps local jobs and businesses – for every pound spent, 64 pence is recycled into the local economy. In fact we get a pretty good deal for our taxes. The average UK household relies on benefits and public services worth more than £10,000 every year – more than they contribute in direct or indirect tax. Those in greater need, such as the elderly, people with disabilities or children in poverty, rely on public spending even more – and would be hardest hit by cuts. As Polly Toynbee put it so succinctly in the Guardian; “In every downturn, politicians and press turn on the public sector – feather-bedded, gold-plated, protected… Picking on choice examples of public excess, the right aims to persuade voters to cut services in ways that will cause immense public harm.”

So was this crisis caused by too much public spending as the free marketers claim? The answer is ‘no’. The UK still spends less (21 per cent of GDP) on public services and social security than France (29 per cent), Germany (27 per cent), Italy (25 per cent), or Sweden (29 per cent). Before this crisis, total UK public debt was less than 40 per cent of GDP – lower than other comparable economies and lower than it was in 1997. It was irresponsible borrowing and lending in the private sector that caused this crisis. In 2008 household debt was 109 per cent of GDP, and corporate debt almost 300 per cent. Public deficits are now rising fast because the government has had to take on the private sector’s bad debts and counteract the damage to the economy.

The April Budget statement revealed the full extent of the damage done to the public finances by the credit crunch and resulting recession:

  • sharply falling tax revenues mean that the UK government is borrowing £350bn over 2009-11 to maintain spending plans, meet increased benefit needs, and inject £20bn stimulus
  • in addition the UK government’s interventions to secure the • banking sector are now estimated to entail a permanent cost to the public purse of £20bn (HMT) to £130bn (IMF)
  • as a result, total public debt is expected to double to 80 per • cent of GDP by 2014, or more if Treasury forecasts prove over-optimistic. It is worth noting that other countries have faced similar issues, so UK public debt will still compare well to other G7 countries.

According to the Institute for Fiscal Studies, the government’s figures suggest that it needs to close a £90bn annual fiscal gap in order to stabilise its financial position and prevent further growth of total public debt. The figures in the budget indicate an aim of closing this £90bn gap by 2018. The Tories have indicated that they would seek to close this gap more quickly if elected in 2010.

Roughly £10bn of this fiscal gap will be filled by new taxes such as the new top rate of 50 per cent on incomes over £150k, and increases in fuel duties and National Insurance. However, a greater amount will however be recovered through cuts to planned spending. Total spending is now planned to fall by 0.1 per cent a year from 2010-11 to 2013-14. When increased debt interest and social security payments are taken into account, this could amount to a cut of 2.3 per cent in departmental spending every year.

  • roughly £15bn will be cut from planned capital investment – building and maintenance of schools, hospitals, and other facilities – which will be halved over the years 2011-14.
  • roughly £20bn will be cut from planned current spending – including around £15bn a year in new efficiency savings (see below)

Beyond these measures announced in the budget, according to the IFS around £45bn remains to be made up. The Budget postponed this squeeze to 2014-18, and did not specify whether these would be achieved through spending cuts or tax increases.

Whilst this is the UK position there are direct consequences for Scotland. These are analysed in the CPPR study of the Scottish Government Budget ‘Growth Prospects and Budget Options’ (August 2009). They estimate an 8.5 per cent (£2.5bn) real terms cut in the Scottish Budget between 2009-10 and 2013-14. This could be less if the UK government protects their health and education budgets because the Barnett consequentials would be more favourable. However, to do that the UK government would have to make even deeper cuts into reserved budgets like defence. The same problems face the Scottish Government if it seeks to protect health and education.

Most commentators expect this issue to dominate the politics of the next decade. Already the government is coming under pressure from the Bank of England, IMF and international credit ratings agencies to commit to sharper public spending cuts. According to Martin Wolf of the Financial Times, the next government ‘will have to be tougher than Margaret Thatcher … It is clear what this must mean: a sustained freeze on the pay bill; decentralised pay bargaining; employee contributions to public pensions; and a pruning of benefits. It is obvious, too, that this will mean massive and painful conflict between governments and public workers’. Scotland’s own neo-liberal commentators, including the authors of the CPPR report, argue that Scotland should follow the English approach of competition and water privatisation.

On the other hand, some encouragement may be taken from a MORI opinion poll conducted in April found that “on balance, more people think that a future Government should raise taxes (53 per cent) rather than reduce spending on public services (35 per cent) if it has to reduce its debts”. There is also positive support for public services. A recent poll for the BBC showed 65 per cent of the GB sample, 72 per cent in Scotland, would oppose cuts in public spending. There are, broadly, three ways in which the UK government could seek to avoid making these cuts:

  • more public borrowing – should not be discounted but there would be real doubts as to the sustainability or credibility of additional borrowing to finance current spending given the levels of public debt already reached and risk of global financial markets losing confidence in sterling or UK government bonds. There would be a stronger case for additional borrowing – or, even, direct monetary expansion – to finance capital spending. The pace of repayment could also be reviewed.
  • cuts to other spending programmes – abandoning Trident, Eurofighter, and ID cards and could deliver savings of around £5-10bn a year. Taking PFI and other outsourced services in-house could also deliver some savings on current spending (likely to be in the low billions).
  • increased taxation – estimates suggest an additional £10bn a year could be raised from the top 1 per cent of incomes (above £100k), a further £10bn from the rest of the top 10 per cent (between £100k and £40k), and perhaps another £10bn through a crackdown on corporate tax avoidance. More than that would probably require increases in the basic rate, NICs or consumption taxes paid by those on or above ‘average’ incomes (around £25k). A ‘payback tax’ could be proposed to claw back costs of the financial sector interventions once the banks are stabilised and moving back into profit. Even the former CBI Director, Adair Turner, now sees the merit in a Tobin Tax on bank profits.

The options for the Scottish Government are more limited because they don’t have the powers to take these actions. Of course they wouldn’t need to if the UK Government took the necessary steps.

Mrs Thatcher’s rallying cry ‘there is no alternative’ is clearly back in vogue with a new generation of free market advocates. Apparently unchastened by the mess they have created and the huge bill we are all being asked to pay for their greed and economic incompetence. In their Alice in Wonderland scenario the public sector that sustained us through the crisis is the disposable villain and the bankers and their bonuses, essential to the economy. There is no doubt that the challenges facing the public finances are massive. But there are alternatives. Not palatable ones to the free market gamblers – but they now look a lot more sensible to the rest of us.