We don’t have the money to just spend, spend, spend
There is much excitement about a Labour video which purports to show why austerity doesn’t work. It takes the form of a series of short scenes: a minister decrees spending cuts, so a teacher has to make savings, so a restaurateur has to cancel renovations, so a builder has his hours reduced, so the economy shrinks further, and so on.
A jagged hole cuts through the reasoning here but, given the enthusiasm with which the clip is being shared online, it seems not to be obvious to everyone. So let’s spell it out. If the video’s logic were correct, the reverse would also apply. All a country would need to do to guarantee growth would be to pay every teacher – indeed, every state employee – a million pounds a year.
Think of the stimulus effect! They’d have so much money to spend that every restaurateur could expand his business, every builder would be able to demand a pay rise, tax revenue would soar and there’d be even more to pay public sector workers.
We know, intuitively, that that wouldn’t work. If it did, every government in the world would be at it. But it’s important to put our finger on why it wouldn’t work.
The reason a government can’t spend its way to growth is that every pound pumped into the economy must first be suctioned out of the economy. As a rule, a government will spend that pound less wisely and less efficiently than the taxpayer who was made to hand it over. This is not because governments are malign; it’s because they do not have the information that you have on the ground. No private pension provider, for example, offers as poor a return as the state pension.
The nineteenth-century French economist Frédéric Bastiat called it “What we see and what we don’t”. An increase in public sector pay is visible. Not so the things that will now not happen as a result of that money having been vacuumed out of the private sector. So, to go back to the video, a pay-rise for the teacher actually means that the restaurateur has less to invest, because he has to pay higher taxes. It means that the
‘The Government is still spending more than it raises to the tune of about a billion pounds a week’
builder’s take-home pay falls, so he has less to spend in the shops, and so on.
In a perfect world, I’d like to pay teachers more. Who wouldn’t? But – sorry to be a bore about this, but it can’t be repeated too often – the Government is still spending more than it raises to the tune of nearly a billion pounds a week. Yes, the deficit is falling – precisely because the cuts are working – and that has allowed some relaxation in spending constraints. But we are in no position to spin the taps open the way Jeremy Corbyn wants.
The flaw in Labour’s thinking can be summarised in nine words. Consumption is a consequence, not a cause, of growth.
Oxford will be a poorer place without Jeremy Catto, the mediaeval historian who died this week. A don’s life has, in general, become more systematic, more professional, more predictable – and a good thing, too. But Dr Catto stood out, like some rough primeval rock rearing through a quadrangle’s manicured lawn, a throwback to the colourful professors of Victorian Oxford, living unmarried in Oriel College and making the university his family. Almost everyone who came into contact with him academically bears his imprint, but especially those who were touched by his gentle strain of High Toryism: Chris Patten, William Hague, Alan Duncan, Niall Ferguson. It’s fair to say that his literary output was limited, but his intellectual legacy is vast, for he showed two generations of undergraduates how to think.
The most valuable lessons he imparted had little to do with history. He was more interested in teaching young people how to approach an intellectual challenge, how to relish an argument and, not least, how to socialise over wine. Are such characters still possible in an age of trigger warnings, micro-aggressions and safe spaces? The question is almost too depressing to ask. FOLLOW Daniel Hannan on Twitter @DanielJHannan; at telegraph.co.uk/opinion