To Borrow or not to Borrow?

The ICAEW (the accountants) had a conference on securing public finances on Tuesday. They published a document including my contribution in Securing the Public Finances. It is comforting that a consensus is emerging that we need to develop a new approach to public services with much better transparency and accountability that we presently have. Whether within government or for citizens, there is inadequate accounting and financial management and too few ways in which citizens can understand or contribute to what is going on.

Jonty Oliff-Cooper from Demos was particularly interesting in talking about new ways in which we need to open up to new ideas and citizens’ input. Clare Tickell also described the work that we have been doing at PST2020.

The consensus of the professionals engaged in delivery and of those actually managing the money contrasts with the approach taken by some economists. I hear there is a petition out there arguing that it is essential to keep borrowing ‘until the economy recovers’. They call upon the ghost of Keynes in supporting additional borrowing in a crisis.

I think this is misguided. Firstly, we have absolutely followed the Keynesian advice to borrow in a crisis to keep the economy going. That is why borrowing is now reaching 12 per cent of GDP. This does not mean that even more borrowing is thus justified.

Now that the economy has turned the corner we need to give the private sector space to recover. This will not be achieved by continuing to fill the bucket with more public borrowing which will crowd out other investment, raise interest rates, and damage our international standing.

It is very unfortunate that economists live in a static world in which the ideas that recovery takes time and needs confidence fails to fit the models. The confidence of investors appears often in Keynes’ writing but in the subsequent models has been lost in favour of a simplistic view that somehow government and private spending can just be switched on and off.

The crisis has created the best chance we have in a generation to get some focus on the size and deliverability of public services. On the previous path, there was a lack of control and trends in demand for health and on aging which cannot be met. I think it is essential that we debate this and decide what a new model of public services might look like.

Bridget Rosewell

Inequality or Poverty

I am exercised by the distinction between caring about poverty and caring about inequality. We might characterise this as the distinction between 'look after the weak' and 'soak the rich'! There is now a literature about how getting richer only helps people feel better off up to a certain point, while for rich countries, being better off does not make a difference.

It is then argued, in books such as the Spirit Level, by Wilkinson and Picket, that it is reducing inequality which is the key to making us better off in rich countries. But I am not convinced by their argument.

Partly, this is because the statistical relationships that they derive are not very powerful. In particular there is a very weak discussion on the direction of causation between, for example, trust levels and inequality. If these links cannot be made strongly then a policy of reducing inequality will be expensive and completely ineffectual.

What is especially frustrating is that instinctively it seems reasonable that inqualities of various kinds would become more important as societies become richer. What is important is to understand how much more important and what it means for the functioning of a stable society and its ability to provide satisfactory lives for its citizens. It does not help to be told that successful societies can be forged in the community of war - this does not seem to be a good policy option!

By contrast, I do not think we pay enough attention to the causes and consequences of poverty, which at the same time has become a mainstream industry for policy makers, public sector staff and think tanks. From the foundations of social democracy, reducing poverty has been a central aim. What is so extraordinary is that so little appears to have been achieved. The Public Services Trust 2020, of whose investigation into the future of public services I am a Commissioner, has detailed the failures of our services on a number of levels.

It seems to me that one root of this is a failure to distinguish between services that are essentially for all, (and for which all bear a responsibility to use wisely and to understand their costs and benefits) and those for which those who pay and those who benefit are never the same. It is in the interest of the producers of these services to confuse these differences - even if they do not mean to.

Until we debate these distinctions more clearly, we risk continuing to go round in circles in these debates.

Bridget Rosewell