A word about money and about how government could better spend it to rejuvenate the economy.

In looking to the near future a rejuvenated NHS and social care will need to spend more money. So it’s probably worth thinking through some of the issues about our economy and where that money might come from.

As a small trading country with a large economy Britain will be hit harder than most by the savage interruption in the global economy that the Covid pandemic has created. No-one can be sure, but it looks likely that, even without a second wave of virus, our economy will reduce in size this year by 10%. Since this has never happened before no-one really knows what this might mean.

In the NHS we know about the reverse of this situation. In the first 8 years of this century GDP was growing and the percentage of it spent on the NHS grew in proportion. Since the NHS was receiving a bigger slice of a bigger cake, it received a lot more money every year.

If the NHS is now to receive a bigger slice of a smaller cake, things will not be the same. Given that for a while we will be a poorer country, it seems foolish to assume that all the money necessary will be available.

I’ve recently been posting about developing a new set of social care services. The crisis has shown, fatally for too many people, that social care is far too fragile to be depended upon by the millions who do. Just to reach basic sustainability social care will require much more money from that reduced GDP.

Economically we have come through the crisis off the back of 8 months of historic borrowing which will not be repaid for a very long time. However long that takes, it looks very unwise to build an economic recovery on a belief that levels of national debt can go higher and higher. It won’t be brought down to 2019 levels for more than a decade, but it can’t keep increasing annually at 2020 levels either.

The realities of tight national economics will make 2021-24 much tougher years for the NHS and social care services than we had hoped.. But it’s likely to be much much tougher for the rest of the economy and the many millions who depend upon it for employment.

I take the Johnson government at its word that it will not want to return to the austerity years of 2010-2020 and will want to spend money to rejuvenate the economy – especially in seats from those poorer areas of the county that returned Conservative MPs last December.

To achieve this the Government will need to start spending money this autumn in such a way that it quickly gets into local people’s pockets and they spend it in local stores on local products so that the local economy is rejuvenated. This local theme is very important here and, if we were having this discussion 45 years ago (and yes, I know some of you were not born), I would not have to insert the following explanation of Keynesianism.

Keynes believed that increasing public expenditure could break an economic cycle. The cycle he wanted to break was one that had started with a recession leading to increased unemployment. That in turn resulted in ex-workers having less money to spend, causing a fall in demand for goods and services. That led to a further fall in employment leading to more ex-workers having less money to spend on goods and services. And so on and on.

This was the ‘recessionary cycle’ that Keynes suggested needed ‘counter cyclical spending’ to break. Keynes suggested that spending public money during this cycle would increase demand for goods and services and stop the economic decline.

(Contemporary note: between 2010 and 2020 the British economy barely grew. Over that decade annual public expenditure was savagely reduced in the belief that somehow the private sector would grow the economy in the space left by public sector cuts. Those cuts meant that for a decade demand for goods and services from a large number of people declined. This decline meant that for a decade the GDP only grew ‘anaemically’. We have been lucky enough to live through a decade-long failed experiment which has left both major political parties agreeing that in 2020 we need some Keynesian counter cyclical spending).

But Keynes concept of public expenditure was much cleverer than just spending money. He calculated that if you spent a pound through people who would spend it in local stores, it would ‘multiply’ the benefit of that pound for the economy.

Let’s, for example, give an extra pound to a person living on minimum wage in Bishop Auckland. If they spend that pound in their local shop and the local shopkeeper spends it on buying local goods for the shop, and the person who made those goods spends that pound locally, then a single pound has had an impact on the local economy of – in this case – four pounds. Public expenditure of one pound results in a fourfold increase in benefit for the local economy. That’s how Keynes thought public expenditure could work. But only if you were careful about how you spent it.

Now let’s take another example. Give that pound to a rich person in Bishop Auckland in the form of a top rate income tax cut and it’s likely that the pound will be spent on  extending a skiing holiday. This does very well for Switzerland, but has a zero impact on the economy of Bishop Auckland.

Keynesian economics is not very difficult (in the very different era of the mid-1960s it was so normal I was taught this for ‘O’ level economics) but it does mean that, if you want your public expenditure to regenerate the economy and be counter-cyclical, you need to make some very careful decisions about what you spend it on. And what you don’t spend it on.             

To achieve the economic rejuvenation of ‘left behind’ areas, this Government looks likely to spend public money on “infrastructure” projects including not just transport projects but also new hospital buildings. At first sight this seems like a good way to rejuvenate the local economy – but it takes a very long while.

It’s true that building a hospital needs labourers to do some of the work and that some of them will be local.  If we started now and moved at breakneck speed those labourers will probably start working in September 2023. In the meantime public expenditure will go on planners, architects and lawyers who don’t live locally and like skiing. Very little of the steel and bricks needed to build the hospital are made locally and given the way in which current medical education takes place virtually none of the doctors at the hospital will come from the locality.

Spend £500 million on a local hospital and you would do very well to get a positive impact on the local economy of £250 million. And that over 7 or 8 years. Increase the minimum wage in that local area by £100 million and you are likely to have an impact of about 400 million. Within a year.

Rejuvenating ‘left behind’ economies will be all about making specific choices.

After the last decade, I am really pleased that the Government now believes in a policy of public expenditure to rejuvenate the run-down localities of our national economy. But I am not sure if this Cabinet, its advisers or the staff in HM Treasury has anyone who actually believes in how Keynes suggested this would happen.

My big worry is that we have a right-wing libertarian government who didn’t really believe in epidemiology and the necessity of lockdown and therefore didn’t do it very well.

It’s just possible that the same right-wing libertarian Government will try to rejuvenate the economy through Keynesian counter-cyclical public expenditure and may not do it very well either.