Tuesday, 13 March 2012

Public sector cuts: an amplifier for economic problems?

On Thursday, I got quite angry with the BBC Look East presenter who said that everybody agrees that cuts are necessary in the public sector (in this instance the police force), but that the only question was how they were going to go about that. Apart from there being a huge campaign against public sector cuts, which proves the presenter wrong, cuts to police services would actually reduce the amount of public money entering the local economy (through the salaries of police employees) and instead would be funnelled to... oh, yes, the banks, because they've got to pay back that deficit.

I'm not saying that cuts are not necessary altogether. I agree we need to reduce the deficit, but if you're looking at an entire economy, you won't solve the crisis by cutting public spending internally, unless there is somewhere to take up the slack in the private sector. With unemployment at a 17-year high, there is obviously not the capacity there to take up the slack. The crisis is just being made worse, whereas there are some measures that would improve the economy, help to cut government spending indirectly, and improve tax revenues without actually having to increase tax rates.

Essentially, this is done by plugging the leaks in our economy. If you think of an economy (e.g. the Norwich local economy) as a bucket of water (water representing money), and that there are leaks in the economy where money passes out of the local economy to financial centres or abroad, for example, it is clear that the water will diminish, unless either of those leaks are plugged, or more money is injected. With cuts to public sector spending, the input into our economy becomes less, whilst the leaks are unchanged, and the depression in the local economy deepens.

Plugging the leaks in government infrastructure spending

I am always rather upset when the government announces a huge major infrastructure project that is being awarded to a foreign company. I don't care how much more it costs by using a British contractor because, in the end, if that money returns into the British economy, it costs nothing to the British economy, because the total adds up to zero. But when contracts are awarded abroad, that is an instant loss to Britain's economy of the full amount being paid abroad. It seems that this issue, which is totally ignored by the government committees awarding these contracts, is central to keeping a stable economy.

Examples of contracts which have gone to foreign companies which could have quite easily gone to British firms are the contract for the Census last year, which went to American defence corporation Lockheed Martin, and high speed trains which were awarded to a Japanese company, rather than Bombardier, which has factories in the UK.

If these contracts had been awarded to companies who operate in the UK, the government would have benefited from reduced social welfare payments through lost jobs; increased income tax revenues from workers employed in the UK; an improved local economy in the areas where the companies are operating, helping to fund local projects, rather than requiring grants from government; and increased corporation tax revenues (provided that the companies don't avoid tax).

Plugging the leaks in local expenditure

The aspect of plugging the leaks that I think we can get most excited about in Transition are those that really include local communities. Anything where ownership is local and where money circulates amongst those within a community, rather than out to national or international markets, will benefit the economy and therefore the strain on government spending.

If the government tried to make local business more competitive to local markets, rather than subsidising international corporations and supporting the companies with the biggest spending power, there would be a lot more money being spread amongst the actual population, again leading to less money required for social welfare and more money in tax revenues from companies and individuals doing beneficial work.

In our own spending

It isn't just in public spending that this makes a difference, but in any spending that occurs in the local economy, so I urge you, next time you're forking out some money, to consider how much of that money stays in the local area, and how much goes out to national or international interests, never to return. This isn't just about choosing a locally-owned shop over a national chain, but where were the products they sell made? And what about your rent or bills? Does your landlord spend the money that they get from your rent in the local economy, or do they spend most of it on interest payments to national banks?

This article is inspired by, and uses references to the nef campaign Plugging the Leaks. If you want to become more active in promoting leak-plugging in Norwich, I'd love to hear from you! Contact me at simeon@simeonjackson.co.uk, or fill in my survey and mention this article in your comments.

Images: "Austerity Isn't Working" from UK Uncut campaign website; Plugging the Leaks bucket from the publication by nef.

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