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Why governments can't just spend and spend

Labour is hard at work preparing for election day. On billboards up and down the land, posters with "Tory Cuts" emblazoned upon them with the "Y" replaced by a pair of vicious looking scissors. The message is clear—vote Conservative and Hague the Ripper will come along and ruin your communities. Labour is attempting to use its incumbency advantage to tip the political debate in favour of discussing the benefits of public spending, instead of cutting taxes. As usual with politicians, though, the debate is entirely specious.

If Agatha Christie were writing the story of this election, it would be known as 'The Case of the Hidden Record'. Everyone would think that Mrs. Thatcher did it, in the government, with the spending cuts but on closer inspection, we'd find we'd been duped by spectacular misdirection. Public spending rose under Thatcher from £256.6 billion in 1979, to £303.5 billion in 1991 (at 1998-99 prices). At no time under her régime did overall spending actually fall. Of course, though, that shifty Mr. Blair spent all that period promising to spend even more money, and so has no interest in exposing the myth.

Thatcher, of course, did not want to spend that sort of money, at least not in her ideal world. The legacy, however, of the post-war Keynesian settlement was one of massive state involvement in the economy. In 1974 state spending amounted to 48.5 percent of Gross Domestic Product. This massive level of state involvement was largely down to the policy of using state spending and credit expansion as a means of attempting to sustain economic growth and offset market induced problems in the economy. This meant that the state took control over more and more areas of the economy whenever growth looked like it was about to flag. It also meant that the state was in a position where it could not disinvest without causing massive social disruption. As a result, spending needs were locked in.

The Tories, when in Government, struggled to make the necessary state payments without incurring political fallout from contradicting their declared aims about low taxation too much. In the aftermath of the 1990-2 recession, the Tories chose to raise gross public sector debt to the equivalent of 52 percent of money GDP in 1995, as compared with 33.3 percent in 1990, rather than take the politically embarrassing decision to raise taxes to fund their spending needs. Much of those spending needs, such as welfare and the dole, lay outside the immediate control of the Major government, and instead lay in the operation of the capitalist business cycle and in demographic shifts within the economy itself.

Labour, Tory, same old story
Labour came into power in May 1997 explicitly committed to adhering to the Tories' projected spending plans for its first two years. According to an Institute for Fiscal Studies report, however, published in January, “Public spending in the first three years of the parliament was actually lower in real terms than the Conservatives' plans.” ( Although some of this fall in expenditure is due to factors such as a fall in unemployment caused by higher economic growth during the boom, discretionary expenditure actually fell too. Much of the money saved on borrowing, however, was spent on repaying the debt of previous governments, especially that of the Tories under Major.

The Blair administration also carried on the Tory position of nominally seeking to reduce and constrain public spending. The central tenet of their spending policies is the Golden Rule: “Over the economic cycle the government will borrow only to invest and not to fund current spending”—in other words, that any government borrowing will only be for tangible and saleable assets, rather than the pit of consumables such as stationary, staff wages and welfare benefits.

Whether this is achieved or not (and when it is, it is often done with the help of some “creative accounting”) the relationship between the state and private sectors is necessarily a tense one. Unlike the private sector, the state does not set out to valorise its capital—that is, it does not generally set out to add value to its capital by turning it into saleable commodities through the exploitation of wage labour. As a consequence the state cannot offset the depreciation through wear and tear of its capital by a fund taken from profits. The capital value of its infrastructure, then, can only be maintained via drawing capital away the rest of the economy. And government borrowing is only a form of deferred taxation.

As, Ken Livingstone has asserted over the Tube privatisation, no public body in Britain has ever defaulted on its debts, so consequently the state has an excellent credit rating. Financiers can lend to the state with next to zero risk, which means that the state can get first preference on borrowing and thus (as their rivals see it) deprive other capitalists of much needed finance and heavily contribute to upwards pressure on interest rates. Having access to cash when others are going short means that the state also appears to have a competitive edge in acquiring other resources it needs. The size of state spending thus becomes a battle ground within capital as regards the distribution of the spoils of the exploitation of the working class—unpaid labour, or “surplus value”.

Prescott's baby
Attempts to reduce the proportion of surplus value sucked away from productive capital by the state sector have come in a number of forms in recent years. For instance, spurred on by John Prescott the Labour government has pursued the Public Finance Initiative, or PFI (aka Public Private Partnership, PPP) first introduced by John Major. This has involved state bodies being handed over to the private sector for management, or the state agreeing to use private sector buildings for its hospitals, on fixed term contracts. Essentially, it has meant getting private firms to manage staff and infrastructure to provide state services. The provider firms are then competing over who can best exploit their workforce—a process Marx describes in a fragment from Capital as “sweating”, something which was going on even in the 1860s. Although still only providing a service of a certain value, the PFI firms can make their money through “efficiency savings” and applying greater workplace discipline to the staff to extract surplus value from them. And by the government detaching its involvement with some previous spheres of state activity, there are savings to be made for the state here too, though judging by the financial commitments of the government to PFI initiatives over the next few years, not as much as they might ideally have wanted.

This kind of approach has a predecessor in local government. The Tories—determined to bring local authority spending under control—at first imposed caps, i.e. spending limits upon councils so that effectively their spending was set centrally. On top of that, however, they imposed compulsory competitive tendering, so that council services could be sold off to private firms. At the time Labour loudly disputed such policies, but it has refused to remove spending caps from local authorities in the way it earlier had promised; it has though changed compulsory competitive tendering into a policy of “Best Value”, which subjects all spending proposals to the constraints of finding the cheapest source for providing them.

The other feature of initiatives like PFI is the old Pig in the Trough scenario. The state has a lot of desirable money, and it is in the interest of individual firms to compete to get their hands on it. Of course, the prospect of such filthy lucre leads to corruption and cronyism. Indeed, the whole tendering process for PFI contracts is corrupt in the sense that firms involved demand payment just to make a bid in the first place. The involvement of the private sector, however, does not change the fact that the state is essentially unproductive, and the PFI just represents intensified conflict for a share in already created surplus value.

This, then, explains not just the ongoing desire of capitalists for “cheap government” and the endless promises by the politicians—Labour and Tory—to find ways to cut public spending, but also their apparent prejudices against the state, reflected in common beliefs about state spending being inherently inefficient and inflationary and suchlike. Indeed, if anything goes wrong with the economy, the state, which looms large and threatening in the minds of many capitalists, is the first in line for blame, closely followed by the politicians employed to act as its managers and overseers.