Will all business leaders applaud cuts?
Business leaders have been arguing passionately that the public sector needs to become more efficient. You’ll recall that the equivalent of a plane-load of them publicly backed the Tories’ general election campaign to make additional savings in public expenditure this year – in order to avoid that national-insurance rise they hate.
Well, it’ll be interesting to see how they respond, now that their dreams have been made a reality.
Because a good proportion of the savings announced today will hit them directly.
So, for example, the Treasury has announced £1.15bn of cuts in discretionary spending by Whitehall on items like consultancy and travel.
Who receives the bulk of such largesse? Well, it’s private-sector consultants and travel companies.
There’ll also be £95m of IT savings – again a squeeze on monies handed over to private-sector contractors.
A further £1.7bn will be saved from delays and cancellations to contracts and projects – which is probably £1.7bn of revenue that won’t be received by companies.
On top of all that, there are the reductions in funding for regional development agencies, which could have an effect on financial support received by many thousands of businesses.
In other words, the harsh reality of making government more efficient may not be quite so appealing as the theory to the many business leaders who sell goods and services to the public sector.
As for those business leaders who recognise that there’s no gain without pain, they’ll only be half-impressed by today’s one-off cuts.
They’ll see most of today’s savings as so-called low-hanging fruit, blindingly obvious examples of eliminating unnecessary expense: what they’ll want to see is a cultural revolution, to improve productivity for years to come and create a waste-averse climate in every allegedly cushioned nook and supposedly feather-bedded cranny of the public sector.
Meanwhile, there’s another paradox about the effect on jobs of today’s cuts.
George Osborne said – and passionately believes – that the cuts in public spending that he announced this morning, and the further and deeper cuts that will be chosen in the autumn, will over time create jobs rather than contribute to intractable long-term rises in unemployment.
The chancellor bases this optimistic view on the assumption that shrinking the public sector, and narrowing the gap between what the government spends and what it receives in taxes, will liberate the private sector – which, he hopes, will create the jobs that are shed by the public sector.
How compelling is this argument?
Well, most would concede that interest rates paid by households and businesses will be lower, in the absence of a collapse in confidence in the government’s ability to pay its debts – and that therefore the interest burden on the private sector is irretrievably linked to the perceived financial health of the public sector.
Which means that the private-sector benefits if banks and investors are impressed by the coalition government’s determination to shrink the public-sector deficit earlier and faster than the previous Labour government would have done.
But there is an internal contradiction in one of the underlying arguments deployed by the Tories when saying that the state must be shrunk from the 50%-or-so share of GDP that it currently represents: to wit, that the public sector is intrinsically more wasteful, less efficient and less productive than the private sector.
Most research proves that the productivity of public sector is indeed lower than the private sector. But the lower productivity of the public sector means – by definition – that each extra pound of reduced public-sector spending will tend to lead to relatively more jobs lost than are created by each extra pound of income received by the private sector.
To put it another way, the lesser efficiency of the public sector means that it creates more employment than the private sector when expanding, and sheds more when contracting.
Of course, that’s not an argument for increasing the size of the public sector relative to the private sector. If that went on indefinitely, we’d all be in the workhouse.
But it does mean that shrinking the public sector can in the short term bring a huge human cost, in jobs lost, and hopes of fulfilling employment dashed.
Which is presumably why the chancellor has not used all his public-sector savings to pay down the national debt. He has also authorised £150m of new spending, to create 50,000 adult apprenticeships, and he is allowing £50m to be spent on the modernisation of further-education colleges.
Shrinking the state may well boost the creation of sustainable jobs in the longer term. But the immediate effect must be to increase unemployment.
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