Labour austerity looks inevitable

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It’s impossible to disagree with Labour leader Sir Keir Starmer when he says that Margaret Thatcher was responsible for significant and long term changes in the way that the UK economy works, or that she entered government with some clear ideas about what she wanted to do. Whether the changes were a good thing or not is much more arguable, to say the least; and the idea that those changes released entrepreneurialism in the UK has been succinctly rebutted by Prof. Richard Murphy. Perhaps Starmer merely wished to praise the determination and attitude she showed rather than what she actually did, but it didn’t sound that way when he said it, and not for the first time he seems to be struggling to ‘correct’ his words retrospectively. And whether it was politically wise even to go that far is another question entirely – why on earth raise a comparison to Thatcher when you’re staring at an open goal left by Sunak?

There is a fundamental belief at the core of Conservative ideology that the private sector and the public sector are in competition, and that the private sector creates wealth whilst the public sector consumes it. It’s clear from their statements that better public services depend on private sector economic growth that Starmer and Reeves also believe it. They’re not alone: it’s one of those things that is so ‘obvious’ that many people across the political spectrum believe it. It’s also absolute tosh. It may be based on a confusion between two different meanings of the word ‘wealth’. There is the wealth which all the individuals in a country own, measured by bank balances and assets held, and there is the wealth of the country as a whole, measured by GDP. The ‘growth’ that Starmer is referring to is an increase in GDP, but an increase in spending by the public sector leads to the same amount of GDP growth as the same amount of increased spending in the private sector. Given the way that GDP is calculated, it cannot mathematically be otherwise. Certainly, some people became extremely wealthy under Thatcher, but much of that was a redistribution of wealth from the poor to the rich, and the ever-increasing gap between the richest and poorest in society is the most pernicious long-term effect of Thatcherism. The accumulation of private wealth in an ever-smaller number of hands is not the same as an increase in national wealth.

There are, of course, arguments to be had about whether it is ‘better’ for investment to come from the private sector or the public sector – and the public sector’s record in managing some projects and investments leaves a lot to be desired. Whether that is inevitable or a result of structural or procedural problems is a debate for another time, but the idea that only one of those approaches should count in measuring growth is just ideological bias. When the private sector invests, the money comes from a combination of borrowing and income raised from customers; when the public sector invests, it comes from a combination of borrowing and taxes raised from the population as a whole. In GDP terms, whether we pay for something out of tax or as part of the price of the goods and services we buy is irrelevant – we’re still paying either way. It’s just that tax deducted from salary is more obvious. And in either case, 'borrowing' is a simplistic way of describing a complicated process whereby the government - or the banks operating under government licence - create and destroy money at the press of a few keys, as well as borrowing directly from people who see their loans as investments.

The debate which we should be having – and which a Labour Party worthy of the name would be leading rather than suppressing – is about which things we want to purchase collectively through the state, which we want to leave to the profit-driven market place, and how we decide between the two. It’s a point which ideologically-driven fiscal conservatives like Starmer can’t even begin to understand. And that lack of understanding leads inevitably to Labour austerity.

It's about how wealth is distributed

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One of the old chestnuts trotted out by the PM in his ‘conference’ speech this morning was that it is the private sector which provides the nation’s wealth. It’s one of those ‘truths’ which many believe but which is, in reality, complete nonsense. The problem is that people who argue that are defining ‘wealth’ in a limited way.

If we define ‘wealth’ as the accumulated value owned by individuals, then there is, indeed, no doubt that that ‘wealth’ has been obtained through the profit-making activities of the private sector. But there are two important caveats to that statement. The first is that increasing private profit does not in itself lead to an increase in the total wealth of a society. In many ways, profit simply redistributes existing wealth from the poorer to the richer. An increase in private wealth, if squirreled away or taken offshore can actually have the effect of reducing the total amount of wealth in a given economy. The second is that one of the biggest customers of the private sector is the public sector itself; without public sector spend, the capacity for making ‘profit’ would be greatly reduced.

The alternative definition of ‘wealth’, and the one preferred by economists, is measured by GDP (or more usually these days GVA), which is ultimately simply a measure of how much money is in the economy and how fast it changes hands. It is a measure which is ‘blind’ to the question of whether the economic activity producing the GDP occurs in the private sector or in the public sector; it really doesn’t matter. There are sufficient historical precedents to demonstrate that GDP (and therefore overall wealth) can and does increase, even if all economic activity is carried out by state agencies and nationalised companies, enough in itself to disprove the PM’s point.

Whether the two alternatives increase wealth with equal efficiency in the use of resources is a rather different question. Whilst there is no obvious or necessary reason why state-run enterprises should be less efficient or profitable than private enterprises, we know from experience in the UK and elsewhere that, in practice, it has generally been the case that they are. There are a number of reasons for that (not least of them being the inclination of politicians and civil servants to attempt to micromanage), but that is a question for another time. The point is, though, that Johnson did not argue that case at all; he argued in black-and-white terms that the public sector does not create wealth.

Whether from ignorance or ideology, the PM clearly identifies ‘wealth’ with that which is owned by wealthy people. They would be his cronies and donors – the sort of people who have been getting contracts from the public sector without even having to go through any sort of competitive tender since his government came to power. It is an ideological position which leads directly to the transfer of assets and resources from those held in common by the state to those held by a few private individuals. It may or may not be an approach which increases the total amount of wealth in an economy, but it is definitely an approach which makes some people wealthier, by transferring such wealth as does exist from the many to the few. In that regard, he is more of a traditional Conservative than some are giving him credit for.

Fiddling at the fringes

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According to this story yesterday, job losses in the Welsh public sector could be up to 26,000, and each job loss in the public sector could be matched by a job loss in the private sector, pushing the total cost to the Welsh economy up to around £3.65 billion.  I assume that to be an annual figure, although it wasn’t stated as such, and nor was there much by way of clear justification of any of the other figures.  I’m not sure how confident we can be, as a result, in the precise figures, but there are some key general points that do emerge.

The first is that cutting spending in the public sector is not neutral in its effect on private sector employment.  There is a direct knock-on effect as the public sector places fewer contracts and buys fewer goods and services.  It’s a relationship which should be obvious, really, and I don’t understand why those who are so keen to cut the public sector quickly and deeply don’t understand that relationship. 

The result is that, even if we assume that the private sector is going to create jobs to take up the pool of labour created by public sector cuts, the total number of jobs needed is much higher than simply those cut from the public sector.  And that’s just to stand still, without doing anything about the high levels of unemployment which were there to start with.

The second thing that struck me about the report was the quote from the IoD representative, who claimed that “the private sector was doing its best to create jobs to compensate for public sector cuts”.  I’m not convinced about that.  For how many organisations in the private sector does the question of ‘creating jobs’ feature in the mission statement, strategy, or objectives?  Not many, I suspect. 

Private companies exist to make money for shareholders, not to employ staff, and part of the reason that the economic system is badly broken is that there has been an obsession with ‘efficiency’ as companies try to produce more goods and services more cheaply – generally for less effort using fewer employees.  Whilst it’s true that the expansion of private companies can create jobs, that’s a side-effect – it’s not the aim.  Suggesting otherwise is mere spin.

The third point is the repetition of the canard that the problem with the Welsh economy is that we are “over-reliant on the public sector”.  That’s an ideological belief rather than a statement of fact.  There is no magic number for the percentage of the economy which belongs in one sector or the other, and it really doesn’t matter, in terms of GVA, whether a particular activity is carried out by the private sector, by the public sector, or by the private sector as a contractor to the public sector. 

(I’d accept that there are questions about whether the public sector has historically been as ‘efficient’ as the private sector.  That’s a subject for another day, but the point is that there really is no inherent reason why the public sector should be any less productive or effective than the private sector.  And there have been, in the past, plenty of examples of profitable businesses in the public sector – until they were sold off.) 

Who owns enterprises is irrelevant from a GVA perspective, but we’re stuck in the Thatcherite mode of believing that only private profit can drive an economy, and that the state should only concern itself with the provision of a limited range of services.  It’s a paradigm which patently isn’t working, yet governments and oppositions alike only offer us more of the same.

On the same page as that story was the report about Cameron stating that “getting debt under control is harder than envisaged…”.  The only thing that surprises me is that he or anyone else would be in any way surprised at that.  Increasing the numbers of unemployed people reduces tax revenue and increases benefit expenditure, leading to the government needing to borrow just as much as if they had stuck to Labour’s plans.  They’re effectively just spending a similar amount of money in a different way.

Labour seem to take some satisfaction from that, but they really shouldn’t.  The difference between the two parties' approaches is little more than fiddling at the fringes.  £6billion may sound like a lot of money, but it’s really neither here nor there in the grand scheme of things.  But within the current paradigm, fiddling at the fringes is the best we’re likely to be offered by conventional political parties.  None of them is offering a real alternative.

Sharing out the rewards

Tweet I’m not sure that I’m really terribly worried about the fact that there are thousands of people in the public sector paid more than the Prime Minister. Superficially it may seem odd that there should be any, but it’s nothing new; senior civil servants have long been paid more than their political bosses.

It’s very often the people working in our public services, rather than the politicians, who have the real expertise. Although there are politicians who have detailed knowledge and expertise in a range of fields, the only formal ‘qualification’ that they need is the ability to persuade people to vote for them. Or perhaps more accurately, get themselves selected where people are going to vote for their party anyway.

I don’t see anything intrinsically wrong with paying experts more than politicians; so the real question for me isn’t how many people are being paid more than the PM, it’s whether they have the relevant expertise and skill to justify their rewards.

The element of the story which interested me more was the comments by Francis Maude. He said that it should not be necessary to offer "stupendous amounts" of money in the public sector, and went on to add:

"You can square the circle of having really good people not on telephone number salaries and massive built-in bonuses. That public service ethos is very important. People will come and work in a public sector for salaries that aren't competitive in a private sector sense."

Up to a point, I agree with him. People who are committed to the ethos of the organisations for which they work, or the services which they are providing, will not necessarily be forever seeking the highest possible level of personal rewards. But what does that say about the private sector?

Are the high rewards of some therefore correspondingly justified by their lack of commitment to what they are doing? Is it right that the highest rewards go to those who place their own personal acquisitiveness above the wider needs of society?

Maude seems to be saying that the most selfless amongst the most able should reap the lowest rewards, whilst the highest rewards go to the most selfish, even if, in pursuit of their own interests, their actions are directly detrimental to the interests of the majority.

At its heart, it's a statement of an ideological position about the nature of human society, where resources are distributed on the basis of competition, but it doesn’t fit my own view of what attributes ought to attract reward. And it is certainly not an approach based on any evaluation of the contribution people make.

Who generates wealth?

Tweet It's not actually a very easy question to answer. Marx took three very thick volumes (well, two extraordinarily thick and one ordinarily thick) to try and answer it, and having waded through it (turgid, to say the least) when I was still at school, I've never been entirely certain that he succeeded.

The common belief seems to be that the private sector creates wealth whilst the public sector merely uses (or even worse, destroys) that wealth. That's an oversimplistic assertion which needs to be challenged more robustly than usually happens, not least because it's an assertion which is a factor in the round of cuts we're about to suffer.

Firstly, we have a whole host of people in Wales (myself included) who work in the private sector for largely public sector clients. Does that make us wealth creators or not? And if I did exactly the same job for a salary in the public sector, would that change my status?

Secondly, the government recently effectively nationalised some banks. Does that mean that they moved from the private sector into the public sector? Does it change their status as wealth creators?

Two simple examples which show that it's actually a rather more complex question than it can sometimes appear.

The hang-up over the relative size of the public and private sectors is another one of those hidden ideological differences. There are a number of reasons why the private sector may do some things better or more efficiently that the public sector, but it ain't necessarily so. And there's no reason why wealth cannot be created by public sector bodies and enterprises.

We'd be better off discussing that we want to achieve and how than getting hung up on arguments about the relative size of economic sectors.

What are we really missing?

Tweet There are a number of basic and very important facts in today's front page story in the Western Mail. There are also a few assertions which are not facts and which need to be challenged. And the headline is a complete non-sequitur.

The headline, like much of the story, seems to be based on the assumption that high earners and wealth creators are almost interchangeable terms. They are not.

Certainly, there are high-earning entrepreneurs who do create wealth, but not all high earners fall into that category. And low-earners can create wealth as well.

There are other high earners who accumulate wealth, mostly by redistributing it from other people into their own bank accounts. Then there were the high earners in the banks and hedge funds who managed to destroy a lot of our wealth by their actions. And finally there are high earners working in the public services. More of any of these might not actually be the answer to anything.

The other myth which needs to be challenged is the idea that becoming wealthy is the same as creating wealth. It is not necessarily thus.

Wales certainly does need to create wealth, in the sense of increasing our overall collective wealth and our levels of GDP per head. That doesn't necessarily involve ever greater levels of inequality, though, and to suggest that it does has more to do with ideology than economics, as does the underlying assumption that 'becoming personally wealthy' is the only driver of economic activity.

The fact that Wales has a comparatively low level of income inequality is actually something which I welcome; the gross levels of inequality which permeate the world in general are a major part of the world's problems, not part of the solution.

If we are to solve Wales' undoubted economic problems, we need to make sure that we understand what they are. A lack of billionaires isn't one of them.

Two legs, four legs

Tweet Around a quarter of the workforce in Wales is directly employed in the public sector. Nobody doubts that cuts in public expenditure will reduce the number employed in the sector, although by how many is still an open question. It would be a mistake to assume that the private sector will somehow 'pick up the slack'. It would also be a mistake to assume that the private sector will be immune to public sector cuts. It's not always straightforward to differentiate between the two sectors.

As an example, I work freelance through a limited company which I use to invoice customers, pay my own suppliers, and pay myself a regular salary out of irregular income. Very private sector. But a lot of my work comes from the public sector.

Sometimes, I get work passed on from other companies which have sold more services than they are able to supply in-house. Those companies are also very much in the private sector – but an awful lot of the end customers are in the public sector.

It's one small illustration, but there are many thousands of employees in Wales who appear to be working in the private sector but who are actually heavily dependent on public expenditure for their livelihood.

My point is two-fold. Firstly, if anyone working for a private company is sitting there thinking that public sector cutbacks will only affect other people's jobs, they may well be deluding themselves. And secondly, we need a better understanding of the complex relationship that exists between sectors in our economy, rather then the Public Bad, Private Good mantra which many seem happy to chant.

Experience desirable

Tweet In the latest issue of 'Agenda', Geraint Talfan Davies underlines the extent to which elected members in Wales are drawn from the public rather than the private sector. There's just the barest hint of a suggestion that private sector=good, public sector=bad. But does it really matter? It seems to me that the answer depends on the answer to a question I have asked before - what are MPs and AMs for?

If they are primarily intended to be a representative sample of the population, then the analysis performed by Mr Davies merely reflects the fact that Wales is, to a very large extent, a public sector economy. One may have different views as to whether that is or is not a good thing; but if we want a parliament reflecting wider society, the public sector bias should not surprise us.

If they are there to represent the electorate in their own area, then whether their background is public or private sector would not seem to me to make a vast amount of difference; the question is more one of whether they have the relevant skills to do the job. And if they are there to pass laws, there is no obvious reason why a background in one sector is more appropriate than a background in another.

There is, however, one part of their function where it may make a difference – and that is the business of governing as opposed to legislating or representing. But even then, it's not a public sector background per se which may be questionable; it's more about the type of experience which people have gained - although there are some types of experience more likely to have been gained in the private sector than in the public sector in the economy as it is today.

When ministers are appointed, a number of factors come into account. First ministers and prime ministers need to reward their political allies and supporters; their foes may need to be punished, or if particularly popular, placed into a position where their loyalty is guaranteed. Ability to run a major department is something of a secondary consideration in all of this.

If Mr Davies was challenging whether the background and experience of too many politicians left them ill-equipped to take ministerial office, I think he'd have a much better point. Hapless Hacker may be something of a cliché, but it's a result of a system where the senior civil servants have the experience and ability to run the departments, and politicians struggle to exert any real influence. Lack of comparable experience may well be a significant factor in that regard.

The civil service is an inherently conservative institution, and many public sector organisations are similarly conservative in their approach. If we want government to drive real and deep change (which is surely the starting point for any radical politician), we need ministers who impose their will on their departments.

The current system does manage to produce some of those, but I don't think that they're the norm. Choosing ministers solely from the ranks of the legislature doesn't seem to me as being necessarily the best way to get more of them either.