“We’ve tested to destuction this idea that actually expansive public spending will bring about growth and it hasn’t worked,” says Ruth Porter of the Institute of Economic Affairs
Electoral mastermind James Carville famously posted the reminder, ‘it’s the economy, stupid!’ on the wall of Bill Clinton’s campaign HQ before triumphing over George Bush Senior in the US presidential election of 1992.
It was one of three key strategies – but by far the most memorable – penned by the Democrat, who then earned further accolades for his political consulting nous.
At the time the global economy had undergone two years of pain following unusually weak growth in the US, which itself could be traced back to a stock market crash in 1987.
Carville’s simple slogan recognised the essential truth that governments rise or fall depending on economic forces – or at least their competency in managing them.
Fast forward 20 years and the size and depth of the recession now is, by any measure, far greater and more serious than it was following the early 90s downturn.
For many, the 2008 credit crisis, or the beginning of the ‘Great Recession’ as some are now calling it, has led to calls for a fundamental reassessment of capitalism itself.
Although few intelligent people would seriously advocate abandoning money and returning to bartering, economists are rethinking old arguments about how to get things moving again.
It is fair to say Ruth Porter, Communications Director of the Institute of Economic Affairs, caused more than a few shockwaves when she lobbed the proverbial grenade into a packed room of delegates at Holyrood’s ‘Future of Public Service Delivery’ conference in Edinburgh in November.
Her brand of economic thinking – unashamedly libertarian and characterising big government as the enemy of the smallholder – forced former First Minister Henry McLeish, who chaired the event, to follow her pronouncements on everything from slashing benefits to stopping state pensions by declaring that he agreed with absolutely nothing she said.
But Porter insists the perpetually flatlining economy is symptomatic of a failure to curb government spending fast enough.
“We’re in a state now where the national debt of the UK – and this is just the explicit debt – is about £1trn. By the end of the parliament it’s going to be closer to probably around £1.6trn depending upon what happens with growth. The question becomes how much more money do you want to borrow?
We’ve tested to destruction this idea that actually expansive public spending will bring about growth and it hasn’t worked and it’s not working. So I think it’s time for a new strategy.” One of Porter’s main hopes is to rebalance the economy away from public sector jobs to encourage, in particular, small and medium-sized businesses to get a foothold.
Based on the most recent figures available, the number of public sector jobs in Scotland has, as a percentage, fallen from around 25 per cent in 2008/09 to 22 per cent last year.
To put it in context, that is around three or four percentage points higher than the typical public sector jobs ratio for most of England and Wales, excluding Northern Ireland.
“I don’t think Scotland is in quite as difficult a situation as Northern Ireland but it’s not far off. Some areas of Scotland, again if you start to break Scotland down into the regions, some areas of Scotland face more difficult challenges than others. But across Scotland as a whole, compared with most regions of the UK, Scotland does have a higher ratio of people employed in the public sector; it does have more public sector money spent per head on people.” Porter suggests there is also a direct correlation between heightened government spending and negative growth, in terms of Gross Domestic Product (GDP).
“There really is a challenge in terms of rebalancing away from the public sector to the private sector. If you look at research that’s been done, what’s pretty clear is that approximately – for every additional 10 per cent that the Government spends – we see growth decline by about one per cent. So there is a very great need for Scotland to look at how it does rebalance, how it does begin to actually cut the amount of public spending which is going on and how it does actually help develop the private sector more. And if you think about it, it makes sense. If you want to have things like money to be able to invest, you need to be able to cut taxes. If you want to have the incentive there for people to get on, to work harder, to build more, if you’ve got very high marginal tax rates, that’s going to be very damaging for the economy.
So there’s all kinds of different reasons for why we need to cut public spending back.” Porter is also sceptical about Scotland’s drive towards the renewable energy sector – with the relatively higher subsidy costs to fund green policies such as wind energy.
“I think one of the issues we’ve got with energy policy is that we’ve got domestic fuel bills being driven up massively. By 2015, electricity will have gone up by about 26 per cent due to climate change policies; for gas, I think it will be closer to 10 per cent. I think this is very difficult for people.” However, a recent report from Westminster’s Committee on Climate Change did point out that renewables, while more expensive in the short term, suggests it will eventually be cheaper.
The report indicated that while green policies may add £100 to household energy bills by 2020, gas-fired electricity generation could increase them by as much as £600 in later decades.
Porter has a long list of proposals which she says could provide the necessary spark to rekindle the economic fires – as well as get the deficit down.
Among them are relaxing the red tape burden on business through deregulation; making people pay towards their healthcare; cutting taxes and liberalising planning law.
“The problem is a lot of the drivers in the private sector, which drive up productivity and encourage different ways of doing things are not there in the public sector. I think we need a much more transformative way of how we look at public services more generally and how we have the right incentives in place. I think, for example, if you look at healthcare – with the demographic changes we’ve got coming – I think our healthcare system faces a huge crisis in terms of funding. We need to look at other, different, ways of funding the NHS which would actually make it more affordable – so are there things like introducing co-payments where people maybe pay a small charge when they go to the doctor, which just alters their behaviour a tiny bit and it makes them think twice about ‘well, do I really need to go to the doctor?’” Whilst Porter appreciates the impact on families who may lose their jobs in the public sector – as much of the spending cuts agenda has yet to be implemented – she insists it is the right course to kick-start growth.
“I think that if you look at, for example, if you have public sector redundancies, for some people in some areas it may well be that they have to go and retrain before they can go and find a job in the private sector. It’s not always as easy as stepping out of one job straight into another and obviously that has a huge impact on their families if they’re unable to work. So I think, yeah, there will inevitably be some degree of pain and government needs to be mindful of that.
“We also need to be mindful of the end goal here and if we want to live in a prosperous society where there’s lots of new jobs being created, where we’ve got the money to have and access a decent level of healthcare and education, where we can fund the police, where we’re not racking up huge debts which we’re passing onto our children, which is going to make it very difficult for them, then I think we actually do need to make some quite radical, quite tough choices.”
From the other side of the argument Crawford Beveridge, Chair of Scotland’s Council of Economic Advisers, which helps influence and shape First Minister Alex Salmond’s policy, believes the only way out of a slump – when consumer spending is curtailed – is for government to step in.
Beveridge, who talks to Holyrood from his base in California, where he is the non-executive chairman of 3D software design company Autodesk, champions the theory of noted early 20th century economist John Maynard Keynes, who advocated just such an approach.
“I am an unreconstructed Keynesian. I think he was absolutely right. I think that’s why – from the Independent Budget Review – we recommended and thankfully the Scottish Government has accepted that they should increase rather than decrease the amount of capital spend they are doing in order to try and stimulate demand in the economy. I just think when you are in a deep hole like we are at the moment rather than – and I understand her economic argument here – take the risk of just bumping along the bottom or going back into depression, I think accepting a little more debt in the short term, if it can actually stimulate the economy, will pay back in the long term through the taxes you’ll take from the increased economic activity.” Beveridge accepts the point that Scotland may have a tendency towards public sector jobs, which he says can stymie private sector growth.
But he is wary of retrenching taxpayer-funded jobs when the private sector is reluctant to hire, as now, when demand is low.
“There’s been the argument in Scotland for a long time that the public sector squeezes out the private sector. It’s also the argument that that amount of public sector employment has tended to attenuate the highs and lows in our economy: in other words, there aren’t always enough people there when the private sector wants to expand because they’re employed in the public sector. On the other hand, when the economy is going down, there are a number of people who still remain in jobs because they’re in public sector jobs and they’re not easily taken out of those jobs.” He adds: “I think what is seriously lacking in the economy – not just in Scotland by the way, we’re seeing the same things in the US – is a lack of demand. If you assume a lack of demand then the private sector won’t be hiring and if you are furiously trying to lay people off in the public sector at the same time then there is no way the private sector can take them up. So all you’re doing is adding to the number of people in unemployment and therefore the nation takes on in paying for those who aren’t in work.” Beveridge is keener than Porter, however, to continue government subsidies for Scotland’s burgeoning renewable energy sector.He argues that Scotland is well-placed to take advantage of clean and natural resources for longterm energy security, which can also bring about economic benefits.
“It is unfortunate that we’ve got to subsidise renewables for the time being but if you don’t start sometime [when do you start?]. These things are only cheaper when people come down the curve of understanding of how you actually provide them and when the technology starts to get cheaper to make because it’s being made in volume and so on.
If you don’t start somewhere you never get there and so if we just sit around and say, some day it will somehow magically be cheaper and we’ll be able to use it then instead of nuclear and fossil fuels and so on, you’re not going to be able to do that. You’ve got to be able to get down that learning curve. You could argue, I suppose, let other countries do that, let the US go and do the learning curve and we’ll just buy the stuff in the end but we will have missed out then on a valuable sector in which we can at least provide some jobs.” As far as where Scotland should invest its future pounds – or euros – to realise its potential, Beveridge is clear: “I think the renewables area; I think life sciences; I think what we’re doing in tourism, in food and drink, are all the right things to be in. What I particularly laud at the moment is the efforts my ex-colleagues in Scottish Enterprise are making to expand the places that we go sell these things since our traditional markets of Europe and the United States – particularly Europe – are likely to be in slow growth mode for several years to come yet. It’s good that they’re out trying to figure out what do we do with Latin America and India and China and bits of Africa and so on. I think we’re probably investing in more or less the right areas and technologies, it’s just a question of how do we get them to market.”