This shouldn’t really be my entry – it should be David Stuckler’s entry, but despite the importance and high calibre of his work nobody in the British political system has listened to him so, after several years of trying, he has gone to Italy where I doubt if he will have seen this competition.
He has shown that the economic multiplier for public expenditure is not the same for all kinds of expenditure and that for some it exceeds the levels at which spending will be self-funding.
For the last 3-4 decades there has been a broad cross-party consensus that public spending is a good thing but that it must be funded out of economic growth and that the public finances must be balanced, so that additional expenditure must be balanced by reductions elsewhere or by additional taxation.
This is so strong a consensus that it seems almost to be common sense. However, in the nineteenth century and the first four decades of the twentieth century it was believed that public spending was a bad thing which drew resources away from more productive expenditure. Following the 1951 Conservative election victory on an anti-austerity platform, there was a quarter of a century in which it was believed that public spending was an economic driver which would produce economic growth through the economic multiplier.
These are often presented as different political or philosophical ideas. But they are not. They are actually scientific hypotheses as to the level of the economic multiplier. In an economy where 40% of GDP is taken in tax, public spending will, as Harold Macmillan believed, be self-financing and an economic driver, provided that the economic multiplier exceeds 2.5. At that level each £1 spent generates £2.50 of growth of which £1 will return as tax. At the other extreme if the economic multiplier was less than 1 it would follow, as was believed in the 19th and early 20th century, that public spending is damaging to the economy. If the economic multiplier is between 1 and 2.5 then the current consensus is right that public spending is a good thing but it must be funded, and therefore it must be carefully and rigorously prioritised.
David Stuckler’s work shows the economic multiplier for overall public spending to be 1.6 which validates the current consensus. It suggests that Jim Callaghan and Margaret Thatcher were indeed right whilst Harold Macmillan and Tony Benn were indeed wrong. But what is extremely important about David’s work is that it shows that the multiplier varies with different kinds of spending. For some forms of spending it is indeed less than 1 and for others it is indeed more than 2.5. Health and care spending, education, spending on public protection and community services and welfare spending fall in this last category.
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This explains why Churchill and Macmillan were successful in using economic multipliers but the ambitious Keynesian programmes of the Heath Government failed. The former spent money predominantly on health, education, housing, infrastructure and social protection, all of them areas with high Keynesian multipliers. In contrast the Heath Government engaged in a general reduction in taxation and increase in expenditure. Stuckler’s work would predict that the former would succeed and the latter would fail. This is what happened. Stuckler’s work explains these historical facts.
It is inherently implausible that the economic multiplier is the same for all areas of public expenditure. Spending money on employing people to do useful work, with the consequent impact of the money when it is spent in deprived areas, will have one particular set of economic consequences. Printing £20 notes and throwing them out of helicopters will have another set. It is unlikely that they will be the same. Indeed, it is odd that for four decades, across the political spectrum, the vast majority of informed intelligent people have believed that public policy should be based on the assumption that they would be.
The areas where Stuckler shows the economic multiplier to work makes sense to those who believe in market forces. They are the areas where the state acts as a collective customer for a genuine social need, rather than using public money to implement political whims.
For all these reasons it is now time to spend more freely on public services and the relief of poverty and suffering. Within reason such spending is likely to be productive. The words “within reason” are important. Stuckler was looking at marginal effects within economies balanced broadly as at present. There is no reason to suppose his findings would hold if money was released more quickly than it could sensibly and prudently be spent, or in such amounts that it would supposedly generate an implausible level of economic growth. These considerations will be an important part of the art of budget-balancing in a world where economic multipliers are again taken seriously.
There are areas of public spending where this approach will not directly produce any change in current approaches. The dilemma over defence spending will not be amenable to this approach since defence has one of the lowest economic multipliers. However, if spending on areas with high multipliers, such as health, education and social protection, produce consequential improvements in the public finances, they will ease pressures on those less fortunate areas too. With a multiplier of 3.7 every £1 of health spending produces £3.70 of economic growth which produces £1.48 in tax. The first £1 is absorbed in the health spending itself. The remaining £0.48 is available to reduce the deficit or spend elsewhere.
If Stuckler’s work is right then we need to shape new ways of controlling public spending which recognise the difference between high-multiplier, moderate-multiplier and low-multiplier areas of spending.
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