How can we be talking at the same time about shrinking public spending on core services while propping up the banks?
With the recent flurry over the leaked Treasury documents ‘planning’ a 9.3% cut in public spending, and the Conservatives’ and LibDem rhetoric, about how fiscally prudent they would be in government, you could be forgiven for thinking that ‘shrink the state’ was the only game in town.
But the truth is we are in a weird position, where the state is expanding and contracting simultaneously. It has moved into new areas of activity in owning banks, guaranteeing the financial system and beefing up financial regulation, not to mention propping up the odd manufacturer.
Economic intervention, in the form of stimulus packages and ‘quantitative easing’, has reached new heights – brought on by the collapse of Lehman Brothers a year ago, and the near meltdown of the whole western financial system.
Yet the paradox is that this huge growth in state intervention has been carried out not to cow capitalism into submission, but to prop it up after the most spectacular market failure since the 1930s. And the even deeper irony is that political attention is focusing not on these changes but on public sector spending and the supposed need to ‘roll back the state’ – but only in core public service activities.
Take the Tories. Faced with the biggest increase in state involvement in the economy since after the Second World War, what do they focus on? Not the nationalisation of the finance system but reducing public debt, which is, after all, only a symptom of the crisis, not its cause.
Across the pond, their Republican cousins have also focused on the role of the state in service provision – in this case, health care – rather than on its new role as guarantor, and part owner, of global financial institutions and markets. Equal confusion and avoidance seem to hold sway on the Left.
We now have a situation where no major financial institution can be allowed to fail, or so it seems, and the state has to act as guarantor – but no-one seems to have a clear idea what that means for future policy.
So far, responses from both Gordon Brown and Barack Obama’s centre-Left administrations have been slow and cautious. No-one seems to know how, or if, the state can either disengage from its role as guarantor of the financial system or take this role seriously.
Even on the subject that is being addressed – the scale and scope of public services and their financing – the debate is focused on the short-to-medium-term problems created by the current crisis. These problems will eventually go away but, under the guise of dealing with them, real long-term alternatives are hazily starting to emerge. In the UK, the consensus on the size and shape of public services that has existed since the start of the new millennium has started to fracture.
The Tories, rhetorically at least, seem committed to shrinking public spending and services. But it is not clear what they are saying. Is it that in the long term we simply need to tweak the amount devoted to public activities – say pushing it down to 40% of gross domestic product? Or are they after more radical change akin to US levels, down to about a third of GDP?
New Labour, on the other hand, seems committed to preserving the current distribution of wealth between public and private sectors, with some medium-term corrections to reduce the national overdraft. This would mean a medium-to-long-term increase in public debt from the original target of not more than 40% of GDP to somewhere around 60%.
So here we are in this amazingly paradoxical situation of the state simultaneously having expanded its role enormously in some areas and being pushed to reduce it, either moderately or radically, in others. No one really seems to have gotten their heads around this unexpected contra-flow yet, and what it means for the long-standing controversies about the role of the state in modern society.
Colin Talbot is professor of public policy and management at the University of Manchester
