Reader's Letter Of The Day

I was drafting a post in my head in response to an article in this morning's Metro reporting that the IMF said that the pace of cuts should be slowed down to protect the economy (or words to that effect), but this reader's letter from the FT has saved me the bother:

Sir, Chris Giles points out that if the multiplier of government spending is greater than 1.0, the impact of fiscal austerity is economic contraction (“IMF forecast leaves chancellor in a fix”, October 10).

The implication is that government spending enjoys a uniform multiplier. Surely, the multiplier varies depending on the type of spending? Furthermore, some spending is more likely to end up as value added tax, personal or corporate tax than other spending.

Therefore, is there not any fine-tuning to be done when implementing fiscal austerity whereby, ceteris paribus, low multiplier spending should be cut before high multiplier spending and the best spending is that which enjoys a high multiplier and ends up as taxable income? Applying this level of fine-tuning may bring the UK back to perhaps zero growth from a current estimate of minus 0.6 per cent without adding to the deficit.

Jonty Crossick, London E1.

That's the whole point isn't it?

i. It's best to view "the government" as a collectively owned service provider, i.e. just another type of business, and start by looking at the benefit we get for each £1 spent. So it makes sense for a supermarket to replace the flooring in the retail areas every ten years, but it makes no sense to replace it in every warehouse every six months, and so on.

ii. If we start at the most basic level, the £20 billion we spend each year on police and prisons pays for itself a hundred times over, without this everything else would fall apart. The £10 billion we spend on road maintenance and the £5 billion we spend on refuse collection or street cleaning pay for themselves dozens of times over, regardless of how they are paid for.

iii. As per usual, the best way of recovering the costs of these core functions is by charging for the corresponding increase in land rental values, and that is also the best way of identifying spending which passes his simple test: "the best spending is that which enjoys a high multiplier and ends up as taxable [rental values]".

iv. Sure, you can argue that there is waste in the police and prisons budget; that the police sometimes focus on the wrong sort of crimes; that there are some people in prison who are innocent or who ought not be there (all of this is true, although we do not know the precise degree); or that local councils don't always get the best deal with refuse collection companies (on the facts, I think they do) etc etc, these are separate topics.

v. At the other extreme is the one or two hundred billion spent/wasted each year on subsidies to banks; fakecharities; corporatists like welfare-to-work providers, windmill installers, MoD overspend, PFI projects; money paid to the EU, the UN; most third world aid, and so on.

vi. The taxpayer generally simply doesn't get any benefit or value for money for these things, and it is mathematically impossible for anything but a small fraction of this to come back as higher tax revenues. It's also highly unlikely that this type of spending boosts the rental value of land.

vii. And there are plenty of types of spending in between the two extremes, in particular transfer payments like welfare and pensions, which you could argue is not spending but negative taxation or, from a Georgist point of view, this is the dividend that each citizen gets in his capacity as co-owner of a mutual service provider and is thus not "spending" at all, in the same sense as police, prisons, roads, refuse collection definitely is spending. Some things, in particular education, are clearly of overall net benefit (up to a certain age - 14? 16? 18? who knows?) but I believe that standards would be improved if parents were given taxpayer-funded vouchers to spend as they wish. And some things, like the NHS are more akin to a low-cost mass insurance scheme.

viii. Some of these hundreds of things are of net benefit and some aren't, but as these things are difficult to measure precisely, personal opinion seems to take over and stifle any sort of sensible debate. But surely, it is idiotic to argue that the £ benefit for every £1 the government spends is the same, and that there is always a net benefit (just as idiotic as arguing there is always a net loss), regardless of what the government is spending it on?