"Public spending pays for itself" - Ann Pettifor
My friend Phin Harper and I made the above diagram a few months back. It uses the example of the SNP flagship promise of a childcare revolution. The exact size of each arrow has been questioned by the Scottish Parliament Information Service, but this is to miss half of the point: whatever the service, if you spend but don't collect taxes, you can't invest.
Public spending wholly or partly pays for itself. There are a three main reasons for this.
The economy depends on the services provided by the public sector. The example the SNP give is childcare allowing parents to work and so pay more taxes, which fund the childcare. But it's also true that schools educate the workforce, meaning more people with higher paying jobs, paying more taxes; early intervention in the lives of children with specific problems reduces crime rates for the rest of their lives and increases their ability to work; a healthier population is a more productive population; and so on.
Public services create the civilisation without which the economy cannot thrive. Investing in them can mean you get back more in tax than you spend on them. If you think education is expensive, try ignorance. If you think healthcare is costly, try illness. And so on.
Secondly, when a pound is spent, it doesn't disappear unless it goes abroad. It keeps circulating through the economy, with a few pence being taken off it in tax each time it is spent – VAT, income tax, etc.
When I spend a pound in a shop, I don't get 20p back when the shopkeeper buys their stock from the retailer, then again when the retailer buys from the farmer, then again when the farmer buys from the seed merchant, and so on. The government does. That which it sews, it reaps.
This matters all the time, but it's vital in a slump. Because government money helps keep the economy propped up at times when everyone else is cutting their spending, the cost of not spending the money and so lengthening a crisis (as George Osborne has done) is often higher than the cost of spending it and keeping people in work, paying taxes, and off social security - Keynes' famous paradox of thrift..
Thirdly, public sector is part of the economy. There is this ridiculous idea, perpetuated endlessly by the media, that the private sector creates wealth and the public sector spends it. Consider this example: Eilidh pays through that part of her salary which goes on national insurance to have her appendix cut out by the NHS. She then pays through that part of her salary which is 'take home pay' to have a haircut. Which of these things is creating wealth? And which is spending it? Imagine we privatised healthcare and nationalised hairdressers. Would those roles then reverse?
When it's the public sector, the media talks about 'spending money'. When it's the private sector, they talk about 'creating jobs' or 'investment'. These are just the same activities with a different spin. Of course, like the hair cut, the operation needs to be paid for, but that doesn't make it a cost to the economy as a whole.
What does this mean and what does it have to do with independence? At the moment, Holyrood spends money, and it can alter the tax rate (a little), but it doesn't collect the taxes. The income it gets is a share of the overall expenditure from across the UK, allocated by the Barnett formula. So if they raise the tax rate, they get more money. But if they raise the salaries of the people of Scotland – and so the amount collected in tax – they get nothing.
This means that if the Scottish government does something to increase the amount of money it's likely to get in taxes in future – for example, spending more on universities, or on early intervention social work, or, as the SNP point out, on child care, it doesn't get the benefit of that investment: the total amount of money raised in tax in Scotland would go up as more people work or as their incomes and so tax contributions rise, but that money would then be spent elsewhere. If you don't get the income from your investment, you can't make it in the first place. That means less money for schools, universities, child-care, care for the elderly, etc.
At core, there is a deep debate here. Thatcherites believe it's only the private sector who create wealth. The humanitarian wing of the Thatcherite movement – Brownites in the Labour Party - think that the role of the state is to then redistribute that wealth. It makes sense that they are against independence. If the only thing the government should do is redistribute, then the country should be as big as possible. Holyrood was set up at the peak of the boom years. The role of the state was, pretty much, to stand back, rub its hands in glee, and spend some of the money magicked up by the city.
We've learnt some lessons since then. Even Ed Miliband (think “pre-distribution”) is starting to see that the government does need to get its hands a little dirty in the practical questions of wealth creation. In this context, separating most spending (Holyrood) from almost all tax collection (Westminster) is hugely problematic. A parliament which sews but doesn't reap can't invest. That means a poorer future.
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