I posted this thread on Twitter this morning:
There is a real problem amongst the hopeful Tory party leaders. Not one of them seems to understand the role that government has in the national economy. It's not the black hole they seem to think it is. It's essential to our national well-being. A thread to explain…..
I try to avoid maths when explaining economics because even the most basic formula seems to make people recoil in shock. But I am going to have to explain one formula to make sense of my arguments in this thread. But, it only involves addition so it's not hard.
The formula is this:
Y = C + G + I + (X - M)
Y is national income, or gross domestic product (GDP) as it's called. C is what we consume. G is government consumption to provide goods and services. I is investment in the economy. X is exports, and M imports.
What the formula says is that our national income is made up of what we consume via the private sector; plus what we consume that the government produces for us; plus what we invest, plus net exports (which is all X less M means). And that's it. It's not really that hard.
In that case let's be clear, what the government does in supplying us with the services we all need adds to our income. Whether it is education, health, social care, criminal justice, and so much else, including defence, government is not a black hole into which we pour money.
Instead - and this should be no shock to anyone, although it seems to be to Tory MPs - the government does useful things that add considerable value to our lives. That is why people are so angry that these services are now being supplied so badly because they are underfunded.
The fact is that we cannot do without what the state supplies to us, collectively. But if the Tory leadership candidates are to be believed we need less of these things the government does for us. They make that clear by demanding that we cut the level of government spending.
But, if they succeed in making those cuts the first thing they will do is reduce our national income. That is inevitable. G is a part of that equation for national income. If the government cuts its spending then G goes down. And in that case income, Y, goes down too.
And let's be absolutely clear about what that means. They will be sacking people in the public sector. 20% cuts is the target. So many fewer tax inspectors, because we don't need them. And fewer people to help the disabled, those on low income and in need.
Fewer teachers, nurses and carers too. And many fewer people checking health and safety. As for climate change, who needs to worry about that? These people need to go, apparently. We don't want them. They do us no good, so the potential Tory leaders say.
But I have news for those Tory leadership candidates. Get rid of these public servants and not only do we lose what they add to the economy, we also lose what they spend as well. They won't be spending much when they're unemployed. Nor will most find jobs as well paid.
That's not because these people are overpaid now but because they're trained to do their current jobs. They're not trained as lorry drivers, sales managers, accountants or whatever other skills we're supposedly short of. So whatever work they take will be lower paid in most cases.
Add these factors together, and cutting government spending poses a much bigger threat to the national income than simply having to find any old new work for the people being made redundant by doing so - which is what this exercise is all about when it comes down to it.
So the first thing any politician proposing to cut government spending has to suggest is what other component of income will go up by quite a lot because the government has cut its spending. The argument of the Tory politician is that this will happen. They have three reasons.
First, they say that we prefer choice to the provision of services by the government. So we spend more wisely than the government does. And they say that the better direction of spending by us that results creates a boost to real incomes. They don't explain how.
Second, they might think investment goes up if people have more to spend because that encourages companies to invest more. Except they don't think that because they also think companies need tax subsidies to invest and they wouldn't if they believed companies would do this anyway.
And they keep demanding more of these subsidies, which have reached epic scale under Sunak. No more investment has resulted, by the way. So, I think we can safely say that Tories don't believe in their market-based arguments on investment and their tax-based ones have failed.
So, what's their third reason? This one is the most perverse. This is that we should now pay for what the government used to supply us with. Students now pay for education, for example and we pay for private medicine because the NHS is overwhelmed. You get the gist.
Now this does not, of course, mean we are better off because we now pay ourselves for what the state previously supplied. Cutting government spending, G, in the hope that we'll buy the same thing privately as part of our private consumption, C, is a bizarre policy.
Healthcare is the obvious way to explain this. Most healthcare outcomes in the USA are worse than in the UK unless you're wealthy. If you're older, or low paid or just downright poor, let alone have a chronic disability of any sort, they're worse.
It's also a fact that US healthcare costs twice as much as UK healthcare. One pound in every 12 in the UK is spent on healthcare. In the US it is one dollar in every six. Why? It's because most US healthcare is provided by the private sector with a profit motive built in.
And why does the US pay twice as much as we do for worse health outcomes? First, because they have to fund profits. And second because they have to pay for the massive admin costs of a private, insurance-based, healthcare system. Together that doubles the price.
And, for the record, Tory reforms are also increasing prices right here in the UK. A single NHS would be much cheaper to run than the fractured service we have, supplied through hundreds of trusts.
That's the same in education too, where academy trusts duplicate costs, enormously, absorbing into admin expenses the money that should be going to frontline teaching. The care system is much the same.
So what the Tories want to do us cut government spending more and make us either accept worse services or pay more for the service we used to have because the private sector now needs to take a big cut out of them.
In that case cutting government spending might appear to force private consumption up because some people will have no choice but pay for what the state previously supplied, but actually people will be worse off. They get a worse service, and pay more.
Who is the winner? The private sector, of course. But let's be clear, those gaining there are the bosses and owners. The evidence is that those forced to take private-sector jobs who previously worked on similar activities for the state invariably end up worse off.
And here's another problem. Paying more to people who already have high incomes and wealth does not increase national income. That's because they save it. They don't consume. They might speculate on property and shares. But neither of them forms part of the national income.
And savings do not fund investment either. It's funded by borrowing these days, and savings do not fund bank lending either, because every bank loan involves the creation of new money: no depositors money is ever involved.
So, pushing income upwards from those who need it and who would spend it to those who don't need and who won't spend it doesn't increase national income. It actually reduces it, whilst increasing wealth inequality.
And remember that almost every programme of government cuts, and all the associated tax-cutting programmes, have this singular goal of cutting the level of government-provided services to force us to buy for ourselves that the state once supplied.
There is no other plan implicit in what the Tories are proposing. This is the only way they can think of to increase private consumption when cutting government spending. But it leaves is worse off.
So, when the Tory leadership hopefuls say they want to cut government spending let's be clear that they are talking about cutting growth. And they are talking about cutting the incomes of working people. And they are talking about increasing inequality.
There is one thing that is guaranteed and that is that public services will be worse. And that is bad for us all. Why? Because these services are what are called public goods. That is they are services supplied for our common good.
The Tories might disagree but the prosperity of this nation is built on strong education, health, a functioning legal system, the provision of a social safety net that lets people take risks, and a functioning tax system that ensures all should be treated fairly.
These things are all public goods, which is precisely why the state has supplied them throughout the lifetimes of almost everyone now alive.
Remove any of these and the rest totter. That is what the Tories want. The resulting chaos is, they think, good for them. But it destroys the public good. And that public good contributes more to the national income than any market alternative can.
In that case the Tory leadership hopefuls are not only suggesting something that is economically dire, they're seeking to undermine the well-being of us all, unless we might be part of the exploitative rich (which their friends all are).
This is a dire scenario and why none of the Tory leadership hopefuls is a person fit to run the country. And so please don't let them tell you stories about how bad government is. Not one of them is telling the truth.
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I went to the doctor the other day and she sorted me out and now I feel fine. I am fit and healthy enough to resume my labours. Good news.
In terms of input (doctor’s time) and output (my improved health) it is irrelevant who paid the doctor.
So, why is it that if I see my GP through the NHS it is considered a drain and a burden but that if I were to see a private GP it would be a positive boost to growth in the health sector?
Of course, it is no different*; so, the idea that all state activity is a burden that is exposed immediately.
What is a burden is klepto-parasitic (lovely word) behaviour WHEREVER it appears….. and today we see it mainly as rentier-ism and monopoly in the private sector.
*actually, it is different as an NHS GP has no axe to grind in prescribing further treatment/drugs unlike a private provider
Of course many economists have identified the weakness of this simple keynesian model and why it breaks down.. Mises, Ricardo,Hayek and Minsky to mention a few.
Ricardo identified the faults in Keynes? Now that is an interesting claim
Twice I have heard Jeremy Hunt say “the government’s own figures tell if we cut corporation tax to 15% we would get half of that back due to growth.”
It sounds like ‘proof by selected instance”, which is not proof at all.
Any tax always has (at least) two important factors – rate and base.
With UK corporation tax, the base is the profits and gains realised by companies resident for tax purposes in the UK (and non-UK companies with taxable business profits or assets in the UK).
If we cut corporation tax by 4 percentage points from 19% to 15% and the base remains the same, that would cut the corporation tax paid by 21% (4/19).
To get that amount back would require taxable corporate profits to increase by nearly 27%. (127 * 15% = 19 = 100 * 19%).
So, to get half of that loss of tax revenue back, he is claiming that cutting tax from 19% to 15% would increase corporate profits by about 13 or 14%. That is the immediate “growth” he is claiming.
So where is that additional tax base coming from? I doubt it is double digit GDP growth the next year.
Perhaps there would be a realisation of some gains by companies selling assets that would otherwise be retained.
But I suspect the largest element is a cannibalisation of some income tax by incorporating self-employed businesses (which loses up to 45% income tax plus 2% NICs).
As a reminder, corporation tax raises about £50 billion each year, less than 10% of the total. Income tax raises over £200 billion, about a quarter of the total, and another £150 billion in NICs and about the same in VAT.
Thanks
The effectiveness of PAYE, VAT, NI is that they are taken at source (effective source). As soon as you allow an accountant or lawyer to arbitrate on something measureed as th length of a piece of string (dressed up with some flabby, fake-rigorous rules), you have lost the power to tax. It becomes an accommodation.
Ow
Said as an accountant
Richard,
You are the special case, but the rule, sadly is long proven ……
May I also say that I am glad to hear that the always thoughtful and an insightful, regular commenter Mr Parry is in good health and was well served by the NHS.
The opposition, and by that I mean anyone but Tory, need to jump on this big time. A slick ad campaign stating that when the Tories campaign for ‘government cuts’ they really mean ‘Levelling Down’ and explain, as simply as possible, why.
This article needs to be on every thread and in every newspaper where prospective PMs put their reasons for cutting taxes, etc. Even my grandchildren would be able to understand that formula. It should also be where every mention of the NHS privatisation occurs.
Does anyone know how many of the candidates still want to privatise the NHS?
Brilliant blogs/Twitter threads today and yesterday, Richard. Thank you. I would like to think that finally some of this will make it through to better audiences on the mainstream media (and opposition politicians).
This is where we need a competent media – none of the interviews I have seen challenge the interviewee on this aspect. Nobody has said where is the evidence to back this up. So, it goes unchallenged and becomes fact in the eyes of some. I may avoid watching the interviews – all I do is rant at the screen and give my BS buzzer a good workout!!
Craig
[…] will only take further money out of an already struggling economy. As the economist Richard Murphy has written: “Get rid of these public servants and not only do we lose what they add to the economy, we […]
“So what the Tories want to do us cut government spending more and make us either accept worse services or pay more for the service we used to have because the private sector now needs to take a big cut out of them.”
They have been steadily doing this for 12 years which is why we now have the highest tax levels and the poorest services. More cuts will of course make it much worse – for he average person, but of course, ever bigger profits for the favoured few. NB how more and more people are being pushed into private medical care as the NHS struggles to provide timely care.
Super stuff.
And do you want to know an even more shocking truth?
Just how much the public sector spends on services from the private sector.
I work in developing affordable (social) housing in a local authority. The public sector does not employ sub-structure contractors, brickies or roofing contractors. It does not buy its bricks, heating systems or roofing from Government outlets. All these resources are purchased from the private sector.
The public and private sectors are INTERDEPENDENT sectors.
The Tories have no concept of this whatsoever. Should they be in charge with such ignorance? Obviously not in my view.
Your last paragraph, Richard.
” And so please don’t let them tell you stories about how bad government is.”
Did you mean ‘..how bad government spending is.’?
(I don’t think anyone needs to tell us how bad government is. We already know…)
I think government is really quite good in the right hands
Really Maggie? I unfortunately had a heart attack last Thursday AM and I can assure you the Scottish Government spending on the Scottish Health Service worked out brilliantly. 7 mins in the ambulance, team waiting at the doors, on the slab in less than 5 minutes and the operation all over within 45 minutes. Back home on Saturday as the proud owner of 1 stent. I observed the ICU and ward closely and from the cleaner upwards to the Professors, it was a very well organised, friendly and efficient organisation.
While lying there I was musing on the Hayek / Libertarian / Mont Pelerin Society view that there is nothing except the family and individual. I think it is fundamentally wrong and at odds with Human nature. There is a socio / psychopathic / narcissistic personality type that their view does fit, but I think this is more a rogue minority. My observation of the hospital was that what people wanted was a place in an organisation where they could be confidant there was a benefit to both the organisation and its users (patients) (plus society), and where they were fairly treated and had the respect of colleagues. I am not completely using rose tinted specs as there were clearly issues about pay not keeping up with present inflation, vacant posts and thus short staffed shifts, and the like that I over-heard.
As money is a man made entirely zero cost commodity, then it should really not be beyond our abilities to organise society such that everyone that wants one can have a place (called a job) that provides them not just with a sufficient income, but more more importantly the feeling of contributing, respect, and belonging that most of us are looking for.
BTW, Richard, I think you could simplify your questions to Tory candidates. How many of them know that GDP = Private Sector spending PLUS Public Sector spending (lets ignore the foreign sector)? Most of them act as if it was GDP = Private Sector MINUS Public Sector. So cut public and you ‘free up’ money, when in reality since our money comes from public spending you actually just remove that money and don’t ‘free up’ anything.
Glad you’re better Tim
Take care
And the rest is noted…
Good lord!!
All the best Tim and get well soon.
Best wishes for a speedy recovery.
I just finished the absolutely brilliant 1000 Castaways by Clint Ballinger. It’s a couple of hours read that concisely and neatly explains the modern monetary system and its two (horizontal and vertical) parts and how they fit together. Lots of it won’t be new to many, but it was the best summary of the importance of both systems I’ve read. Politicians of all stripes would do very well to understand that we need to maintain both a healthy public and a healthy private sector for us to have a healthy society.
Henry. Sounds interesting. I’ve ordered it.
BTW. Could I suggest the Y in the formula could be E for Economy. It is hard to understand why politicians don’t realise that part of the overall economy IS government expentiture. Not helped by the likes of Paul Johnson of the IFS coming out and saying that to cut taxes the government must reduce spending to suit. All economics correspondents are just as bad.
Referring to the formula Y=C+G+I+(X-M). How does tax impact the Y total?
Presumably reducing tax stimulates consumer demand C and therefore Y will increase. But, to keep inflation under control, G will have to fall by a similar amount. The net result will be no change in Y.
In the limit G could be reduced to zero as tax (and government) is eliminated altogether, but who then would create new money?
It doesn’t impact
It’s a transfer p[ayment and these are ignored in this
Of course they do have an impact 0 generally favourable, if they are progressive for reasons noted in the thread
Steve Baker – weird unexplainable b ig influnce on Tory elections – quoted ‘his’ economist – Julian Jessop – (had never heard of him) – on his launching of ‘Conservative Way Forward’ here’s Jessop’s demolition of MMT
this eocnomis – https://www.linkedin.com/pulse/another-critique-modern-monetary-theory-julian-jessop/
I know Jessop
An Institute for Economic Affairs fool
And the critique, as usual, ignores what mmt actually says
Jessop writes: “MMTers argue that government deficits play a crucial role in balancing the economy and are therefore essential, rather than something to fear. The key point here is that deficits and surpluses have to offset each other. (Actually, this is just an accounting identity, rather than a behavioural or causal relationship, but I’ll let that go.)”
I very much doubt he understands the existantial significance of that “identity”. He is letting it go presumably because it is easier to beg the question; perhaps because he lacks philosophical rigour and can’t adequately explain it. His paper is bland, superficial, oddly concedes most key points, doesn’t expalin how he can coherently believe the porridge of confusion which he is creating out of the critical mess he is creating; and relies on what I would term ‘Johnsonian Cakeism’; having your boozy cake and eating it.
If that appers to suggest I can’t take Jessop seriously, I can’t.
“exsistential”.
John,
Re your point on Jessop’s statement “The key point here is that deficits and surpluses have to offset each other.” (Actually, this is just an accounting identity, rather than a behavioural or causal relationship, but I’ll let that go.)”
Maybe Jessop just doesn’t understand how double-entry bookkeeping works?
Very few economists do
And these days when IT does the double entry for them I wonder how many accountants really do
I will never regret that I started on extended trial balances on 16 column analysis paper
One of your best blogs, I hope it is as clearly stated in the book you are writing.
I’m with John Warren, tax needs to be straightforward to collect which means the tax base (income, item price) is unambiguous. Any tax reform needs to use that principle.
(But perhaps I am biased, my grandfather always used to say that his internal technical paper for what was then Inland Revenue was the basis of what became PAYE).
Your economic points on the necessity of government ‘expenditure’ as a vital part of overall economic prosperity are, of course, well made.
However, the level of Conservative ignorance on all of this is so vast that it creatse a chasm into which they can – and will given any more time – plunge the whole of society. The scale of that gaping void has just been sketched out, with flamboyant broad brushes of total irresponsibility, by Kemi Badenoch – God save us the “equalities minister” – in her campaign launch, delivered at the Institute for Government. And, no, I am no making this up.
Her image of making a smaller state is primitive, nasty and sweeping and presented as socially worthwhile. As for the ‘economics’ of all this, she attacks “net zero” as “unilateral economic disarmament”. And there is more and worse. A check on Twitter finds people in enthusiastic raptures. It is indeed as scary as it is ignorant and, since she is emphatic about “telling the truth” (amazing how that is suddenly in fashion) we must fear that she and her acolytes actually mean what they say – often the most worrying thing about right-wing politicians.
She and Braverman are truly frightening, but so are Truss and Zahawi too
Kemi Badenoch?
Where an earth do they get them from? And her husband is a banker I think. Her Wikipedia page is truly appalling.
Trying to cheer myself up……………..
The last Badenoch I knew of was the ‘Wolf of Badenoch’ – an LNER Class P2 Mikado 2-8-2 steam locomotive (numbered 2006) and designed by Sir Nigel Gresley CME later converted to an A2/2 4-6-2 Pacific by Gresley successor Edward Thompson – they were my late father’s favourite steam locomotive class which is how I know about them.
Latterly the name was held by a British Rail Class 87 electric locomotive built in 1974 (scrapped in 2010) – 5000hp, 100+ mph and really efficient but ugly in comparison to the steam loco above.
The name ‘Wolf of Badenoch’ has Scottish connotations as was ascribed to someone called Alexander Stewart, Earl of Buchan who had a bit of a reputation (and somewhat disputed) but being no scholar of things Scottish I’ll leave it at that.
For me the best Badenoch is the A2/2.
The Tory one is definitely best avoided.
When I was 16 I wrote a article in which I described the A2/2s as ‘aesthetic monstrosities’.
They are not graceful. But I quite like them now.
Conservatives as with most on the right tend to go after the big ticket items like public pensions and welfare. They claim taxes will be lower as the state shrinks and disposable incomes will be higher but they fail to explain what you do which is that those on the receiving end will reduce consumption as a result. They will then go after the lack of efficiency in the public sector, but they are assuming a private sector monopoly that will take its place will have the same incentive?! I’m surrounded by people on the right in real life so I understand how they think