The Size of the Public Sector economy
In April, 2011, Cllr Edward Lister, then Leader of Wandsworth Council, said that he welcomed the Coalition Government’s plan to shrink the public sector although he acknowledged that implementing the cuts programme in local government, and in Wandsworth in particular, would be tough. This was slightly odd as he had spent the previous 18 years complaining that successive Governments, Labour and Tory, were not giving the Borough enough money and should be giving it more.
Meanwhile in the Council Chamber Tory Cllr Jim Cousins took every single opportunity to describe the public sector as non-productive. “It is the private sector which creates wealth”, he would say.
The implication from both men’s perspective is that a smaller public sector will result in a more vibrant economy and, presumably, higher standards of living for all.
I have tried to tackle this argument on many occasions, with my favourite example being that of the Thames Barrier, which was built to time and on budget in the 1980s by the Public Health Engineering Department of the GLC (then under the control of that left-wing villain Ken Livingstone) and just before the private sector Channel Tunnel, which opened in 1994 late and 80% over budget.
But I thought I should take a second look at the subject. One thing is undeniable and that is the consistent growth of the public sector in developed societies throughout the twentieth century. Just take a look at the size of the public sector in the USA from 1900-2010:-
A public sector of rather smaller than 5% of the economy in 1900 grows to 35+% by 2010, with three notable and unsurprising spikes as defence spending balloons in 1916-20, 1939-47 and in the early 1950’s (WW1, WW2 and the Korean War). Perhaps not quite so graphically but there is also a near doubling of the size of the public sector, admittedly from a low base, after the election of Roosevelt and his New Deal of 1932.
The twentieth century was, of course, the century of the US imperium. It was also one when the country exploded from a population of 76 million people to very nearly 300 million, with the fastest rising standards of living the world had ever seen. The relationship of this explosive growth seems to go-along with an expansion in the public sector and not the other way round!
Most European countries, with the ironic exception of the ex-eastern block, have a public sector typically 5-10% larger in relative terms than the States. For examle, a similar chart to the one above relating to the Swedish economy reveals a startling similarity, including surprisingly the spikes in the war years – though not the Korean War. All other western European nations follow a similar pattern.
Does their recent relative economic stagnation suggest that there is a relationship and that European countries have gone beyond the optimal level for the size of the public sector? Well not really because in the last decade it has been the Scandinavian countries (and Germany) with the largest public sector budgets that have been the most economically dynamic and it is the Mediterranean countries with their smaller (and relatively dysfunctional) public sectors, which have been doing worst.
Interestingly enough from my analysis the major differences betwen the States and Europe are unsurprisingly the higher percentage spend in the States on defence and the massively higher welfare spend in Europe.
At another level, it seems to me that in almost any country in the world, where I would want to live (apart from micro-states like Monaco or Fiji) the public sector is fairly comparable in relative size to the European and US norms. And this does not seem to me to be very surprising. Mature, complex societies need public works and public infrastructure; they need high standards of public education (a small highly educated elite will not do any more); they need a civic and legal structure carefully regulated and controlled; they need a large public sector, which not only creates wealth but creates the environment for the private sector to create even more wealth.
The flip side of the coin is that almost every country in the world where I would be worried about living has a relatively small public sector. So don’t invite me to Chechnya or ask me to spend an old age in either Russia or China, with their small public sectors (forget the assumptions about communist countries) and scandalous lack of law and order, regulation, public standards and provision for pensioners.
So given the lack of any substantial evidence to justify the Tory diehard position on the scale of the public sector economy just why do they stick so religiously to their current course? Well, it’s the dogma, stupid. The most pragmatic, flexible and some would argue the most successful political party in the western world has morphed into a herd of ideologues – that spells trouble for them!
Tony Belton
Tony Belton 