Monday, June 21, 2010

The domino theory of spending cuts

Sunny may have a point: complaining about damage to public services and unfair harm to the poor will only go so far as a critique of the Budget’s spending cuts. He says that “instead of just defending the public sector, the arguments should be reframed to talk about [the] whole economy in general”. Here’s a stab at a more accessible narrative that does that:

The Tories seem to think that the public and private sectors are each other’s enemies, and that the state’s existence just gets in the way of the market. But in fact, the whole of the economy is deeply interdependent, and public-sector cuts will echo throughout the private sector.

The employees who get paid by the state don’t just bury this money in a hole. They spend it, like the rest of us, mostly in the private sector. Doctors buy furniture. Teachers buy DVDs. Police officers buy broadband. Even bureaucrats buy groceries.

Cuts that hit them will spread through the economy. Like dominoes, if the government knocks some people down then the businesses that rely on their custom will be hit too. If you work for a firm that sells something to these millions of ordinary people, then there’ll be less demand for your work.

The recession officially ended, but the economy is still weak. And with our biggest trading partners in Europe getting into new difficulties, it’s clear that now is not a good time for our government to slam on the brakes.

We do need to reduce government borrowing over the next few years, but we’re not facing the desperate ‘emergency’ that the Tories talk about. The markets have been a lot calmer than the rhetoric, and in fact borrowing has already been coming down a bit as growth starts to return. A rush to make big cuts now will prove a false economy if these tip us back into recession. Growth is a precondition to getting the deficit down, not an alternative.

(OK, it’s a tad weak on nuance, but you can read someone like Martin Wolf if you want an more sophisticated explanation of how ‘crowding out’ is far less of a risk under conditions of low private-sector investment and high unemployment.)


Liam Murray said...

"A rush to make big cuts now will prove a false economy if these tip us back into recession."

That whole narrative rests on that 'if' and there are some very smart people who argue that it wont. Of course there are some equally smart people who argue it will but hey, that's economics for you.

Tom Freeman said...

On the one hand, on the other hand...

Actually, that bit (like much of the rest of the spiel) is an oversimplification for the sake of punchiness: even continued (but slowed) growth as a result of tightening could more than counteract the deficit-reducing effects of that tightening.

Off-topic (but what the hell, it's my blog), I have a pet theory that the Budget might not be as ferocious as most are expecting. Laws and Alexander got some bad news out of the way in advance, the deficit is turning out to be lower than expected, and everything Osborne and Cameron have been saying lately is consistent with some cunning expectation management. We'll see.