Rushed and indiscriminate spending cuts reveal ignorance about the value of productive investment, both private and public
the chances are that we are not only heading for a further recession but that the abrupt spending cuts will fuel the problem and undermine social cohesion.
For those who say there is no social cohesion to undermine, I represent a council ward that 15 years ago witnessed burnt-out cars every night and gangs on the streets causing real damage. It also had a school with 5% A–C passes, no Sure Start and no community events other than bingo.
Today, although the ward is still far from perfect, crime has fallen and it has cleaner streets, a well-used sports centre, two new primaries, regular community events and policing that works. GCSE results have also shot up.
So a lot has been achieved – which means there is much to lose.
The background assumption to the cuts is that public sector spending is ‘nice to have’ but ultimately parasitic – and private sector spending is inherently productive. We are told therefore that public sector debt cannot be afforded; that it is squeezing out private sector investment; and that markets will punish us unless we get a grip. And that grip has to be firm.
This is one of the great myths of our time. Of course, public spending has to be underpinned by a reasonable assessment of future income to cover the repayments. But the crude separation of public and private investment is inaccurate and damaging to the economy and to the social fabric of the UK. What is important is not the category of spending or whether it is public or private but what it is used for and how much it contributes to the wider economy.
To take an extreme example, we cannot say that private investment in nail painting parlours or pizza takeaways will give similar value to public investment in rail networks or skills training. Is public investment in a bus company a drain on national resources but private investment in it a valuable contribution to gross domestic product? Of course not.
This indiscriminate and prejudiced approach to public spending is damaging to both sectors. It undermines the public investment in skills, education, infrastructure and research and development that is so essential to the private sector’s long-term growth.
It also creates an uncritical approach to private investment, some of which can make marginal or even damaging contributions to long-term growth. Sectors such as supermarket food retailing, speculative construction and elements of banking can be overloaded with competition and absorb large amounts of investment and creativity, often with poor social and macroeconomic returns.
The failure to distinguish between productive and non-productive spending also favours service and information businesses over manufacturing and export industries, and short-term over long-term investment. This in turn undermines UK competitiveness.
So where does this leave us? First, government policy is to make indiscriminate cuts in skills, education, capital allowances and regional investment, rather than preparing for growth. Second, the Opposition still does not differentiate adequately between effective public sector spending and desirable but
non-essential investment.
So what are the solutions? We need: better research into the multiplier effect of different types of public and private sector spending; a reform of the banking sector to encourage longer-term investment in areas such as energy supply and infrastructure; incentives to encourage investment via retained profits; differential tax rates for different sectors; and short-term increases in income tax to preserve investment for training and capital.
One reform could be made now – the government could stop denigrating the public sector contribution to the economy, which demoralises both employees and economic confidence.
But what matters most to me as a councillor is the loss of jobs and opportunities, the increase in poverty and the return to the conditions of the early 1990s. Because if the government gets it wrong, as it seems to be doing, it is my constituents who will pay the price.
Graham Chapman is a Labour councillor and deputy leader of Nottingham City Council
