Expenditure cuts “will reduce income, savings and investment”

This morning the Prime Minister outlined plans for hi-tech “efficiency savings”. Much of the speculation around this week’s Pre-Budget Report assumes that priority must be given to reducing public sector deficits over the coming period, if necessary through stringent spending cuts.

But in the latest issue of Renewal, Professors Philip Arestis (Cambridge) and Malcolm Sawyer (Leeds) argue that a slower reduction in the budget deficit would be well worth the faster reductions in unemployment this could allow. By way of illustration, they suggest increasing public expenditure by 6 per cent over the next spending review period (2011/12 to 2013/14) – rather than freezing it, as current plans assume.

The effects on output and jobs would to some degree depend on how it was spent. But taking multiplier effects into account they suggest a ‘conservative estimate’ that such an increase would result in GDP and total employment being 2 to 3 per cent higher than otherwise. There is room for such additional expansion without risks of overheating according to figures that put expected output significantly below trend.

The extra tax revenues and reduced social security payments resulting from this would set back expected falls in the budget deficit by 1 to 1.5 per cent of GDP. This, Arestis and Sawyer insist, is defensible and manageable. Anticipated levels of public debt are not unique by historic or international stanards. Public deficits are needed to maintain growth and employment while private expenditure, investment and job creation is sluggish.

The alternative is much higher unemployment, with all the waste and social distress that entails:

“There will be cries, not least from the Conservative Party, that the budget deficit must be reduced. Let us be clear what the consequences of attempts to reduce the budget deficit, through some combination of cuts in public expenditure and tax increases, would be: higher unemployment, prolonging the recession, and the dangers of a ‘lost decade’ – we have been there before!

“Attempts to reduce budget deficits by expenditure cuts and increased tax rates will reduce income, savings and investment.”

The 6 per cent increase, they stress, is proposed only by way of illustration, and merely restores the growth rate previously envisaged for the period in last year’s Budget. The main point is to plan public spending according to the needs of society for quality public services, adequate housing and infrastructure, and investment in green technologies – and not in response to arbitrary, economically unnecessary and ideologically-driven demands to reduce budget deficits.

• Articles from the latest issue of Renewal on ‘rebalancing the economy’ – which also address issues of income and tax inequality, the increasing indebtedness of working households, the environmental limits to perpetual growth and the prospects for a new era of progressive economics – can be downloaded free of charge for a limited period here.

Our guest writer is Martin McIvor of Renewal