British Labour Government is losing the plot or rather is confirming their stripes

At the moment, the UK Chancellor is getting headlines with her tough talk on government spending and her promise to keep an “iron grip on the public finances”, which she defined as “taking an iron fist against waste”. Okay. This tough guy talk (guy being generic) seems to be the flavour of the month with the incoming US administration also talking about creating a Department of Government Efficiency (DOGE) to hack into public sector spending and employment. Once again we see a Labour government consorting with the ideas of the conservatives. And extreme conservatives nonetheless. The British Chancellor has also determined that public officials are incapable of understanding the priorities and means to provide public services and is going to force the department officials to appear before a so-called ‘independent committee’ of bankers and other financial market types who will scrutinise the financial plans with the aim of cutting 15 per cent over three years from each department’s budget. Another example of conforming to neoliberal ideology. The problem with all this talk, which generalises into public discussions about government spending, is that there is an implicit assumption that it is dysfunctional and just goes up in smoke (waste) somewhere. I never hear these politicians acknowledge that if they actually succeed in making these cuts then a spending gap will emerge and that gap has to be filled in some way or the economy moves towards recession. In other words, what a person might deem to be wasteful expenditure, will always be underpinning GDP and employment growth. Clear up the ‘waste’ and there are additional consequences that may not be considered desirable. At least these politicians and their advisors should make that clear to the public.

First, let’s deal with the proposal for government departments to be vetted by some panel of experts from the financial markets.

The Minister for the Cabinet Office released a press statement (December 9, 2024) – Pat McFadden vows to make the state “more like a start up” as he deploys reform teams across country – which announced his “pledge to make the state ‘more like a startup'” and use techniques developed in Silicon Valley to allegedly improve public service delivery.

Business types will be hired by government on “Tours of Duty” to bring an entrepreneurial mindset to the public service.

A relaxation on recruitment rules will help these characters take over government strategy – a sure fire way for ‘mates’ to be imported into lucrative consulting positions with less scrutiny.

Over the last few decades, the higher education sector in Australia, as an example, has been flooded with this sort of entrepreneurial nonsense.

Academics have been subjected to a conga line of consultants being marched into the universities and preaching austerity and KPIs.

The vast majority of these consultants have never worked in a university and clearly have never taken the time to understand the way these institutions function to deliver research and teaching excellence.

Instead, management consultants come up with ridiculous cost-cutting plans, which cut costs in the areas that actually do the work and pad out the senior management areas, with all sorts of new, fancy-titled positions.

I swear that universities could eliminate almost all of the senior management positions and the institutions would function better in delivering their core functions.

I remember one meeting with the so-called ‘external’ consultants where the ‘expert’ announced that they were cutting costs by eliminating the use of laptop computers.

When challenged he said: “Why do academics need portable computers when they have desktops in their offices?”

It was laughable how little he knew about the daily life of a research academic with global networks.

Anyway, the Chancellor thinks that she can sub-contract her ‘iron fist’ out to some characters from the financial markets including from Lloyds and Barclays banks.

Yes, the same Lloyds that was bailed out by the UK government and partially nationalised during the GFC as a result of their appallingly bad loan behaviour.

And, yes, the same Barclays Bank that saw “four former executives … charged with fraud over their actions in the 2008 financial crisis” (Source).

The other aspect of the madness that British Labour is indulging in at present relates to the Chancellor’s plan to force government department officials to submit their spending ‘budgets’ to a so-called ‘independent committee’ of bankers and other financial market types who will scrutinise the financial plans with the aim of cutting 15 per cent over three years from each department’s budget.

More madness.

1. Government is not a business and its objectives and evaluation criteria are not remotely akin to how a profit-seeking business should assess its progress.

What expertise does a Lloyds’ Bank official have in delivering programs to the poor?

Hazard a guess! Mine is none!

We have seen across many jurisdictions how these ‘efficiency’ drives play out.

In a private business, if costs are cut to the point that service delivery is compromised, consumers will soon work out the problem and shift their custom to another business.

Businesses rise and fall on this basis in the private economy.

However, cutting a government service to the bone is a quite different matter.

There are scads of evidence showing how various segments of the public service have been decimated by these ‘efficiency’ cuts, to the point where basic services are no longer provided.

That challenges our conception of what a public service is.

It is a lot of things but one thing it is not – a product for private shareholders to profit from its sale.

2. The whole point of government is that we elect it and hold it responsible and accountable as our agents, for accomplishing outcomes that we, individually cannot achieve.

Decisions taken by said government should always be scrutinised by the public and our voting intentions signalling our own assessments of the outcomes.

3. In the UK, around 60 per cent of businesses (‘start ups’) fail, for various reasons, in the first three years of operation.

There is considerable ‘waste’ incurred in the startup Merry-Go-Round.

Capital is abandoned, people’s lives are disrupted, and services disappear as quickly as they emerge.

That sort of model is clearly not suitable to government which must run stable departments that deliver secure services to the citizens over long periods of time.

The other point I want to make today relates to the macroeconomic reality of government spending.

Whether one likes where the spending is going is one thing.

And different value systems will clearly have different preferred patterns of spending.

I would defund the military and the support for financial markets and ramp up spending on climate policies and education, health and the arts.

And I might argue vehemently in the public domain for governments to shift their spending priorities.

I might also say that the billions governments spend on making bombs to kill people with is a classic spending ‘waste’.

And I might want to eliminate all such waste from the public sector.

So at that stage I am in agreement with the Chancellor – waste is bad and should be eliminated – even if I readily understand that what might be considered waste is in the eyes of the beholder and I certainly wouldn’t trust private bank officials who come from a culture that landed them in so much trouble during the GFC to be the best set of eyes to make those judgements.

But then there is the macroeconomic issue that is always sidestepped or ignored in these ‘efficiency’ drive discussions.

Every $ or £ or ¥ that constitutes government spending goes somewhere even if we consider the somewhere to be a waste.

At the macroeconomic level of analysis, ‘waste’ has no real meaning.

What has meaning is that spending drives output which drives income generation and employment.

That is the basic rule of macroeconomics.

The government spending also sets of the expenditure multiplier process which simply means that the first recipient of the extra spending from government then is induced to spend some of that extra income elsewhere and that multiplies throughout the economy such that the initial $ spent by government produces a much larger multiple in total income change.

Please read this blog post for more on that – Spending multipliers (December 28, 2009).

Which means that if you start hacking into government spending then the current spending equilibrium will be disturbed and GDP will decline because the spending gap that is created leads to falling sales, rising inventories, production and employment cutbacks and the rest.

The point is that the government spending whether one calls it wasteful or not is contributing to income generation and employment growth.

Take it away and there is a shortfall.

Now the British government might think that the gap will be suddenly filled by non-government sector spending increases.

That is the standard ‘growth friendly austerity’ nonsense that the IMF and its ilk have been trying to convince us of for years.

The facts are the opposite.

When the government imposes cutbacks and GDP starts to tank, households in fear of the rising unemployment cut back too, which then leads to businesses cutting back on investment spending.

It is a vicious cycle.

And if we reflect on the current British National Accounts situation then the government sector is playing a significant role in keeping GDP growth above water.

The following graph shows the contributions to GDP growth by major spending aggregate for the September-quarter 2024 – in percentage points.

GDP growth was estimated by the Office of National Statistics to be 0.95 per cent in the September-quarter 2024.

Take out the government contribution (both recurrent spending and capital formation) and that growth rate drops to 0.2 per cent.

At that lower rate, unemployment would be rising fairly sharply.

In the June-quarter it was even more clear what the contribution of government spending was: GDP grew by 0.7 per cent and the contribution of government equalled 0.66 per cent – that is nearly all of the overall growth.

Without that contribution the UK growth would have effectively been zero.

So the question that the journalists should be asking of government is which alternative spending source is going to fill the gap left by the 15 per cent cut in government department expenditure over the next three years.

Conclusion

Silly people.

That is enough for today!

(c) Copyright 2024 William Mitchell. All Rights Reserved.