Smaller state ≠ smaller deficit

A lot of the commentary around the recent Autumn Statement has been around how the plans to move the government’s budget from deficit to surplus over the next 5 years will involve cuts and a rolling back of the state to 1930s levels of expenditure.  This doesn’t make a lot of sense to me however, because lower government spending as a proportion of GDP does not mean the deficit would be lower. You can just as easily have a 5% deficit with government spending 50% of GDP as you could if they were only spending 35%. The two just aren’t related. For example, Denmark’s government spends about 57% or GDP, but has a budget deficit below 1%. The US government on the other hand spends about 40% of GDP, but has a deficit of over 5%.

It’s probably not possible (even if it were desirable to do so) for the UK to reduce its deficit for the foreseeable future. It has a large trade deficit because countries like Germany, China and Japan have based their economic strategy on exports, so to really cut its deficit, the UK would have to rely on the private sector (households and businesses) taking on more debt. This could work for a while, but as recent history shows us, it’s not really a sustainable economic model. We would probably crash again before the budget was balanced.

So what is this talk of massive cuts all about if it’s not about the deficit? It’s already transparent to many, but it seems to be about ideology. Proponents of a smaller state have given up trying to argue for this on its merits and are instead trying to frighten people into accepting cuts. Will this work? I think not because even if the public did accept further cuts, it’s not a strategy that’s likely to create a smaller state, rather one with worse public services with the cracks being covered by expensive sticking plaster solutions. To really shrink the state would require those in power to forget about the deficit and introduce some huge tax cuts at the same time as spending cuts.

The size of government should be a political question, not a numbers game. What services should the government provide and what should be left to the private sector. Warren Mosler puts it well in his book:

“…the way I see it, we first set the size of government at the “right” level of public infrastructure, based on real benefits and real costs, and not the “financial” considerations. The monetary system is then the tool we use to achieve our real economic and political objectives, and not the source of information as to what those objectives are. Then, after deciding what we need to spend to have the right-sized government, we adjust taxes so that we all have enough spending power to buy what’s still for sale in the “store” after the government is done with its shopping. In general, I’d expect taxes to be quite a bit lower than government spending, for reasons already explained and also expanded on later in this book.”

 

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2 thoughts on “Smaller state ≠ smaller deficit

  1. Alex, my belief is that the call for a small state is a smokescreen. What this camp really wants is an evermore neoliberal state, which is many things, including crony capitalism, securing rents through privatization, PPPs and all the other ways public revenue can be siphoned off into the private sector. In a similar way the right claims to be pro-market but as Galbraith sets out in his The Predator State is again really interested in ever larger public subsidies for capital by any means possible and protection for ripping off the public. Neither a smaller state nor real competitive markets are in their interest.

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