There’s been a lot of discussion about the need for public sector cuts. Give or take the public sector employs about 5 million people. If, as is demanded, there should be public sector cuts of 10% then maybe 500,000 people will lose their jobs.

I have considered the consequence of this by doing a simple exercise. I have done a case study on the cost of a person earning £25,000 per annum who is a single parent with a child of school age, paying £500 a month in rent and £700 a year in council tax losing their job. The assumptions are slightly simplifying: benefits are harder to calculate in more complicated households. The rate of pay is slightly above mean and significantly above median UK pay. But £25,000 is a good, round number.

The total tax paid and benefits received by this person look like this:

Now assume the same person was unemployed. They would get the following benefits:

The total lost to the government if this person loses their job in the private sector is the addition of the total contribution lost plus the total cost paid. That is £21,300.

It could be argued that the cost is less in the public sector because tax deducted goes straight back to pay the employment cost. It so happens the net effect is the same. In that case the comparison with the private sector is maintained here.

The actual cost is higher though. The person in work has disposable income of about £14,625; the same person unemployed spends £7,260. That is a difference of £7,365. In other words they are twice as well off in work as out of work. But, most importantly, of that difference at least 65% (http://www.statistics.gov.uk/pdfdir/qna0609.pdf table D using 2008 figures) will support other people’s wages plus the taxes they spend on goods and services. Assuming these other people pay taxes at about the same overall rate as the person in the above exercise (and this is likely) that means about 36% of that difference will indirectly go in tax as well. That’s about £1,700. So now the benefit of keeping the person in work is £23,000 and they are only paid £25,000. Put it another way: 92% of the cost of cutting a £25,000 a year job when we have less than full employment is paid by the state.

In that case it is abundantly clear that paying to keep people in work pays – especially and even particularly if what they do has long term benefit that saves cost into the future. That cost saving – for instance from green efficiencies – has only to be £2,000 for it to be entirely worthwhile creating a job out of government spending to keep this person in work.

And that is before any account is taken of the social costs of being in employment, which are substantial in terms of reduced crime, improved educational outcome, better health, and more besides.

Now let’s reflect on the fact that in reality the average direct cost of employing an average public sector employee is less than this. Let’s make it around £21,000 – more like median pay – and then note that 500,000 at this pay rate will supposedly save £10.5 billion in the wage cost of the government. Putting these half a million people out of work will save us about £0.8 billion. That’s misery for 500,000 people and their dependents to save just £1,600 per job lost.

That though is not the end of it. Total government spending is £671 billion, split down like this:

So to cut spending by 10% £57 billion of extra cuts are required on top of sacking 500,000 people. These savings would need to be made up of:

1. Reduced benefits, which will result in reduced consumer spending, or

2. Reduced payments to private sector contractors to provide work to the government.

Either way there is reduced demand. £57 billion of reduced demand. Of which 65% approximately will go to labour. That’s £37 billion of labour cuts then. At £25,000 or so a head (approximately) that’s over 1.5 million more unemployed.

That, with the losses from the public sector adds more than 2 million to unemployment – making well over 4 million in all. Some consider this likely, I know.

But what is the effect on public spending? Maybe 92% of the cost of this cost in lost wages will fall on government either by benefits paid or lost revenue. That’s £34 billion. And that’s before we deal with the massive social and crime related costs of that level of unemployment and the collapse in our long term prospects.

So, to achieve total savings of maybe a net £4 billion in borrowing (£3 billion net from private sector cuts and about £1 billion net from public sector employee cuts) this policy would put 2 million people out of work.

Now I know all the problems of extrapolation in here, and I know that not everyone will get benefits in the way I have outlined above (but those that don’t will suffer even more extreme losses in income – compounding losses elsewhere) but frankly all analysis in this area is moving into the unknown, economically and statistically speaking. And losses to government may also be bigger than I suggest – after all out of the £57 billion of non-labour cost cuts required £20 billion will be lost profits and rents – and they could result in £6 billion of additional government tax losses, tipping the equation in the direction of any cuts in government spending creating actual cost for the government.

Which makes clear that the logic of cutting government spending now when we have no jobs for those we make unemployed makes no sense at all. It’s profoundly annoying to have to reinvent the whole Keynesian argument in this way – because that is exactly what I am doing – but needs must precisely because so many do not seem to understand this obvious fact.

Of course this situation will eventually change: private sector demand will pick up and employment with it. But right now there is no sign of that and to cut now would, I can confidently predict, produce something like the outcome I predict here. Put simply: cut spending and we’ll increase government debt. Perverse you might think – but true, and exactly what Keynes predicted.

What is more, the reverse is true. Increase spending now and the multiplier effect which compounds the impact of cuts in the above analysis goes into reverse: more jobs are created, revenue flows to government, benefit spending falls and government debt goes down with it.

The answer is simple: if we want to get out of the mess we’re in we spend. It’s the only way to reduce government debt at this stage in the economic cycle. It worked in the 30s. It will work now. Let’s do it.

I discussed some of the comments on added value ion the public sector with my wife last night. She has an opinion on this. She’s a GP. Technically she’s in the private sector, being self employed and being a partner in a practice run for profit. It so happens however that (like rather a lot of public sector enterprises) she is dependent upon the state for her revenues.

So, is she adding value by recording profit? Or is she, as one commentator (who got his facts wrong, but we’ll ignore that) put it part of the:

Public sector [that] pisses 50% of the wealth up the wall, having taken it from the public by force [?]

Now, I don’t deny GPs are well paid – but after 11.5 hours at work, with 20 minutes break during which she discussed patients with colleagues, and another 90 minutes then dedicated during the evening to researching a patients condition (of which they no doubt will always be wholly unaware), coupled with the low grade worry of having missed a diagnosis that is a perpetual part of a GP’s life – which is why it is one of the highest stress occupations in the country – so it should be. Having been a partner in a firm of accountants I’ll tell you who works harder with more stress – a GP, any day.

And she did that to add no value? To be a burden on society that needs to be cut? I’m sorry – those who write this stuff live in a land of fantasy.

And please don’t say that the market could provide this service instead. Rather unusually my wife has also been a private GP. And she has not a good word to say about it – it is hand holding for the worried well that will never be accessible by the majority of the sick. That is because in this country sickness is strongly correlated with poverty.

This is the reality she faces daily. It is the limitation on all she does. the sick poor are the source of greatest demand on her time. It is why she supports what I do. Only redistribution of wealth, decent housing, properly paid jobs, and the respect that flows from them can cure a lot of the real sickness she sees.

And the market has not supplied that, cannot supply that and has no intention or mechanism to supply that.

Yes we want and sometimes need what the market can supply – which is over half of our national wealth. And I’m fully supportive of that. But to argue that those who work in the public sector – whatever it may be given the porous boundaries it has – are a simple burden is about as far removed from reality as it is possible to get.

As even those with health insurance will notice the next time they are really sick.

I knew it would happen: I just say the public sector adds value and the far right come out in force accusing me of every economic crime imaginable.

Is it worth responding to such people? Candidly, I frequently doubt it: they don’t understand, don’t care and don’t want to do either; that I know. So why bother? Largely because, as Dennis Howlett points out the 90-9-1 rule pretty much works. 90% of people who read this blog lurk unseen (and that’s OK with me, 9% pop up very occasionally and 1% contribute a lot. This comment is for the 90%.

Why do I say that the public sector generates wealth? The glaringly obvious answer is it does. In my own life my birth, education (throughout) and health have been state provided. And I value them.

In the last few years the births of my sons (both complicated) were in state hospitals. Subsequently I can say without a shadow of a doubt the life of one of my sons was unambiguously saved by the NHS. If that is not value, what is? My mother died in hospital after 11 months of NHS care: I hate the think how much the NHS has spent in caring for my in-laws over the last few years. Not only would we have been bankrupt without the NHS, they could have suffered considerably I expect. Again I define that as the most phenomenal added value.

As I also define the police, fire and security services as adding value to my life. And knowing there is a social safety net, which I have not ever needed I admit, but which friends and family most certainly have definitely adds value.

Then there’s the state old age pension: never to be ignored in any financial calculation.

Add on to that health and safety – which means I dare drive a car, travel in a plane and buy a cup of coffee.

Or international development – which partners and supports the charities I choose to support and often provides them with the access they need to do their work.

And what about the arts? I get enormous enjoyment from art which could only happen with state support.

I could go on, and on. But if you cannot see that this lot adds up to added value then it is very clear that you are either blind or choose to be so.

None of which says the private sector is inappropriate (why are these commentators so black and white when the world is always grey?). When there is room for excess capacity then the market can operate – which there is not in health, education and so on if the supply is to be universal. When it can operate I am happy for it to do so – subject always to the fact that it needs to be constrained because the idea that it allocates resources efficiently is wrong: the votes in the system are not allocated efficiently to start with as they are unevenly distributed. That is why regulation and taxation has to tackle this problem. If not too many yachts would be produced and even more would starve to death. On no definition anyone could create is that efficient.

But I stick to my point: a great deal of what we value most is provided by the state. That is why we care about it. That is why we voluntarily pay for it through tax – and vote to do so. That price is at least as well set as one distorted by the impact of advertising.

And value added has nothing to do with the ownership structure of the organisation supplying a service – or even how it is paid for at the end of the day. You cannot, for example, make a nurse and added value supplier by transferring them to the private sector. But if you restricted the supply of their service to large sections of the population  as a result (as happens in the US, for example) you can most certainly reduce well being by doing so.

So those who comment blatantly, and for reasons of outdated and outmoded ideology argue otherwise.

Which is why we need a new economics. Which is why I am working on it.