This guide first appeared in the Aug/Sep 2010 issue of Red Pepper.
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Countering the
cuts myths
The government and the press say
we are in the grip of a debt crisis
caused by the ‘bloated’ public sector.
Here, Red Pepper debunks the
myths used to push cuts to jobs
and public services
Government debt is the highest
it’s ever been
The UK’s government debt is at around 70 per cent of GDP (the
total amount of goods and services produced in one year). That is
certainly high, but it is far from unprecedented.
Government debt never fell below 100 per cent of GDP
between 1920 and 1960. It is only in the past decade or so that it
has become normal to think of government debt being stable at
around 40 per cent of GDP.
It is worth noting that government debt reached 250 per cent
of GDP around the end of the second world war, as the result of
a ‘once in a generation’ economic and political crisis. It is
certainly arguable that we are now living through a similarly
momentous crisis.
The UK’s debt crisis is one of the worst in
the world
Just as the current level of government debt is not
unprecedented historically, neither is it substantially higher than
that of other countries.
IMF data (IMF World Economic Outlook Database, April 2010)
shows the UK has the lowest government debt as a proportion of
GDP among the G7 countries (the US, Canada, Germany, Britain,
Japan, Italy and France).
Much has been made by Cameron and Osborne of Gordon
Brown’s ‘imprudent borrowing record’. They say that before the
spending to stabilise the financial system, public debt was high.
But again, IMF comparisons of the level of public debt prior
to 2007 showed the UK in a much better position than many
comparable countries, such as France, Canada, the US and even
Germany, the home of fiscal rectitude.
22 red pepper aug | sep 2010
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Government debt is ‘unsustainable’
The sustainability of government debt is not just
dictated by its size, but by its make up. We have already seen
that government debt is at a comparable level to other similarly
sized economies. Where the UK is in a much stronger position,
however, is in the nature of its debt.
While countries such as Greece tend to owe money to external
financiers, the vast majority of UK debt – about 70 to 80 per cent
– is held within the country.
And the UK’s debt is not so short term. Countries such as
Greece, Ireland and Portugal have average debt maturity rates of
between six to eight years, but UK government debt stands out
among international comparisons as being much longer term at
well over 12 years on average.
This means that the UK has to ask the financial markets to
refinance its debts much less frequently, making it less vulnerable
to short-term speculative pressures and much more able to
continue to finance its debts on a sustainable basis.
The government shouldn’t get into debt,
just as your own household shouldn’t
This overlooks the fact that, for the past 30 years, governments
have positively encouraged households to get into debt.
In fact, it can be prudent for households to take on debt –
particularly if they are borrowing to pay for something (a house
or educational qualification) that might reasonably be expected to
improve the household’s income and well being in the long run.
In just the same way it is often sensible for governments to
take on debt to pay for investments (such as housing or transport
infrastructure) that will make the economy work better and so pay
for themselves over the longer term.
But the public economy is also different from the household
economy. What might make sense for a household could, for the
government, deepen a recession. When times are hard households
tend to tighten their belts – reducing their spending and
borrowing. But if everyone does this at the same time, the effect
is counterproductive: total demand for goods and services falls,
which makes it harder for businesses and individuals to generate
an income, and everyone ends up worse off.
This is exactly what is happening now, which is why it is
essential for the government to compensate for households’
reluctance to spend and invest.
1
 Public spending got ‘out of control’ under structural barriers to growth presented by climate change and the
Labour depletion of natural resources.
It is true that the Labour government gradually raised public
spending in the early part of the decade, but it was from what were The UK has a big public sector compared
historically very low levels. to other countries
Levels of public spending are now about the same as they were Public spending in the UK is lower as a proportion of the
in the early 1990s, at the time of the last economic crisis. This is economy than in the likes of France, Italy, Austria and Belgium,
because spending always rises during a as well as the Scandinavian countries
recession as a result of welfare spending on (OECD World Factbook 2010).
unemployment. And spending on core areas such as
In fact, levels of public spending as a After the last crisis of health and education remains comparable
proportion of GDP were much lower for or low in relation to other OECD (broadly
most of the 2000s than they were than at this scale, when public speaking, ‘rich’) countries.
any point since the 1960s. For example, the UK spent just 8.4 per
Where Labour did spend more in debt was something cent of its GDP on health in 2007, roughly
the years after 2000, it was necessary half that spent in the United States (once the
to repair the visible effects of long-term like three and a half large private sector is taken into account) and
under-investment. Who can forget schools well behind Germany, France and most other
and hospitals with buckets in the corner times the size it is west European nations.
to catch the leaks, or grim city centre On education, the UK again spends less per
landscapes with crowds of homeless people today, we created the pupil than most comparable OECD countries.
sleeping rough? The UK is not profligate in public spending
Labour’s increased spending also welfare state and does not have an oversized public sector
addressed workforce shortages in compared to similar countries.
schools and the NHS, where more staff
were needed to raise educational standards and care for an Spending on the public sector is
ageing population. ‘crowding out’ private sector growth
Rather than cutting such spending, the crisis could be an It is argued that public spending comes at the expense of overall
opportunity to build the infrastructure of a more energy-efficient, growth, because potential investment is being re-directed into
green economy. That would prepare us for the longer-term taxation to fund an ‘unproductive’ public sector. But in fact

red pepper aug | sep 2010 23

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 investment in public infrastructure and services is essential to output taken up by wages (as opposed to profit) has fallen, and
private sector productivity, and so is no less critical to future growth inequality has risen. The very affluent have got wealthier, at the
than private sector investment. expense of the rest of the population. In 2007/08 the richest
Furthermore, the UK is not a highly taxed economy. The OECD’s tenth of the population had more than 30 per cent of total
comparative figures on taxation as a proportion of overall economic income (‘Income Inequalities’, poverty.org.uk).
output show the UK way down the list, only just above the average. In the post-war period, part of the role of the state was to
It is sometimes suggested that taxes hit the private sector in such redistribute economic surpluses to the wider population so that
a way as to discourage job growth. Again, though, the data shows they could keep spending on goods and services. This was seen
the UK to have very low levels of taxation per job: far lower than the as so important precisely because large inequalities had been
OECD average. identified as one cause of the 1929 stock market crash and the
The second way in which the public sector might be said to be subsequent depression.
crowding out private sector growth is by taking workers it needs, For a while, the problem that rising inequality presented
but this would only really be the case where the labour market was for growth was overcome by the use of credit and the super-
operating close to full employment. exploitation of workers in the developing world, which allowed
With the unemployment rate at about 8 per cent, this is clearly consumers to keep buying cheap products. This is one of the
not the case. and in many areas of public provision – from child factors that fed the debt crisis.
protection, to education and training, to care for the elderly – there is So, yes, there is not enough money in circulation – but this is
a pressing need for more, not fewer, public service workers. precisely because it has been captured by the super-rich.
Finally, some argue that public investment ‘crowds out’ private
investment, because government borrowing pushes up interest Cutting public spending will help us
rates and inflation. But there is no evidence that this is currently avoid economic disaster
a problem – real interest rates are low, and the economy is still A range of economists, from Larry Elliott of the Guardian
operating well below its potential output, which means there is to Nobel prize winning professors like Paul Krugman and
lots of room for non-inflationary public Joseph Stiglitz, are warning that
sector expansion. making cuts now raises the very
In fact, in current circumstances, public Increases in spending real possibility of undermining the
spending is more likely to stimulate private fragile economic recovery.
sector investment by maintaining levels of were necessary after long- As every first year economics
demand and preventing a deeper collapse of student knows, there are four main
economic activity. term under-investment. components of economic growth:
(1) exports; (2) investment;
Public sector workers Who can forget schools (3) household spending; and
are overpaid (4) government spending.
It is true that very recently average wages and hospitals with Over the past two years,
in the public sector have moved marginally governments around the world
above those in the private sector. This is buckets in the corner to have stepped in to bridge the gap
mainly because privatisation has pushed in the first three by providing
many low-paid jobs out to the private sector. catch the leaks? debt-financed public sector
The trend is not that public sector wages stimulus packages. There is precious
have risen sharply, but that private sector little evidence that the private
wages have fallen – a characteristic of the economic crisis. If we take sector or households are ready or able to step up their activity
a longer view, since the 1990s average public sector pay has not seen to fill the gap, or that exports will increase in a world where
significantly more growth than the public sector. our major trading partners are also reining in spending.
And when private sector wages are split up to consider different As such, any austerity programme may prematurely
sector and occupational patterns, a rather different picture emerges. remove the foundations of the recovery and lead to a return
Wage rates differ widely, with the average pulled down by very low to recession – a ‘double dip’. This would be disastrous, not just
wage sectors such as distribution, retail and hospitality. for growth, but in turn for tax receipts and the capacity of the
What the data shows, therefore, is not that public sector state to reduce the deficit and government debt.
workers are overpaid, but that some private sector workers are How will that help to stabilise the world economy? How
severely underpaid. will it deal with the frequent, persistent and cumulative
financial crises that are endemic to it, or overcome the
The financial crisis was caused by a lack of pressing resource and environmental constraints that are so
money in circulation clear for all to see?
This one is true to some extent, but it requires careful explanation. The economic crisis was a golden opportunity to move
The system of finance capitalism pursued in the UK and US since toward a more economically, socially and environmentally
the 1970s has continuously recycled economic surpluses away from sustainable national and international economic system. For a
the poor toward the rich. In both countries, the share of economic while all countries were so concerned about the whole system

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 300% DEBT: OUT OF
CONTROL?
250% Today,

200%
250% government
debt is 70 per
cent of GDP.
During the
150% second world
DEBT: OUT OF that there was at least a chance to overcome narrow self-interest
300% war it was 250
100% CONTROL? and look toward a more co-operative and sustainable future.
per cent
250% Today,
of GDP
We are about to squander a once-in-a-generation opportunity
70%
50%
200%
250% government
debt is 70 per
for progressive change – unless, that is, we organise and
campaign for an alternative.
0% cent of GDP.
WW2 TODAY During the
150% second world that there wasThere at least is no alternative
a chance to overcometo cuts self-interest
narrow
war it was 250 The beginnings of
and look toward a more co-operative and sustainable an alternative have already
future.
100% per
THEcent
100%
RICHEST beenWe discussed. For example, Unison’s
are about to squander a once-in-a-generation alternative budget (‘We
opportunity
10% of GDP
The richest 10 can afford a fairer society’, Unison Alternative Budget and 2010)
50% 70% for progressive change – unless, that is, we organise
80% 30% per cent of the
population
suggests
campaignthat for analmost £4.7 billion could be raised each year from
alternative.
0% gets 30 per introducing a 50 per cent tax rate on incomes over £100,000.
60% WW2 TODAY cent of total About £5 billion There could
is no be alternative
raised every year to from
cutsa tax on
income vacant housing; The£25 billion a year
beginnings of ancould be raised
alternative by closing
have alreadytax
40% loopholes; and the IPPR think-tank has estimated that a ‘Robin
100%
THE RICHEST been discussed. For example, Unison’s alternative budget (‘We
10% The richest 10 Hood tax’ on
can afford financial
a fairer transactions
society’, could raiseBudget
Unison Alternative another £20 billion
2010)
20%
80% 30% per cent of the
population
asuggests
year (T Dolphin,
that almost Financial Sectorcould
£4.7 billion Taxes,be IPPR
raised2010).
each year from
0% All these taxation measures would
introducing a 50 per cent tax rate on incomes over £100,000. be ‘progressive’ in the
gets 30 per
60% cent of total sense
About £5 billion could be raised every year from a tax poor,
that they would divert wealth from the rich to the on
income in contrast
vacant to measures
housing; £25 billion such as the
a year government’s
could be raised by VAT increase,
closing tax
40% which hits and
loopholes; the poor
the IPPR hardest.
think-tank has estimated that a ‘Robin
£120K £5bn ALTERNATIVE HoodIn tax’
addition, some of
on financial these ideascould
transactions mightraise haveanother
behavioural
£20 billion
20% TAXATION advantages: they could workSectoragainst destabilising speculative
a year (T Dolphin, Financial Taxes, IPPR 2010).
£4.7 billion
£100K
0%
+TAX
£4.7 £4bn could be raised
financial flows,
All these or leadmeasures
taxation to fewer empty would be houses.
‘progressive’ in the
bn each year by sense that they would divert wealth fromthat
Similarly, we could look at spending thereally
rich to should be cut.
the poor,
£80K introducing For example,
in contrast towhile
measures estimates
such as of the
the government’s
true costs of replacing
VAT increase,the
£3bn Trident nuclear weapon system vary widely, they tend always to
a 50 per cent which hits the poor hardest.
£60K come
£120K £5bn
tax rate on
ALTERNATIVE Inin above £80
addition, some billion
of theseoverideas
25 years.
might have behavioural
£2bn incomes over Getting rid of the cost of the war destabilising
in Afghanistan, massive
£40K TAXATION advantages: they could work against speculative
£100,000
£4.7 billion consultancy feesoron private finance deals and contractors’ profits
£100K +TAX
£4.7 £4bn
£1bn could be raised
financial flows,
in privatised
lead to fewer empty houses.
£20K Similarly,publicwe could services
look at would also make
spending a difference.
that really should be cut.
£80K bn each year by We could also decide to manage
For example, while estimates of the true costs of the deficit and public the
replacing
£3bn introducing
£0K £0bn a 50 per cent spending in a long-term
Trident nuclear weapon system manner, targeting
vary widely,social issues
they tend such to
always as
£60K tax rate on inequality,
come in above under-investment
£80 billion overin25education years. and child poverty,
£2bn incomes over andGetting
stronglyrid regulating
of the cost international
of the war infinanciers,
Afghanistan, banks, hedge
massive
£40K £100,000
NUCLEAR funds and the like.
£100bn consultancy fees on private finance deals and contractors’ profits
£1bn ARMAMENTS All of these
in privatised are political
public services choices.
would also make a difference.
£20K Getting rid of We don’t have
We could also decide to live toin amanage
world where unemployment
the deficit and public
£80bn Trident nuclear
£0K £0bn weapons
co-exists with a long-hours culture
spending in a long-term manner, targeting social in which workers are so
issues such as
£80 would save stressed that
inequality, mental health problems
under-investment are onand
in education thechild
rise. poverty,
£60bn
bn £80 billion andWe don’t have
strongly to liveinternational
regulating in a world where bankersbanks,
financiers, gamble hedge
(low estimate)
NUCLEAR millions across
funds and the like. the world in elaborate financial casinos at the
£100bn
£40bn same
ARMAMENTS Alltime as 1.4are
of these billion people
political live on less than $1.25 a day.
choices.
Getting rid of We don’t
We don’t havehave to to live
live inin aa world
world where
where unemployment
there is no limit to
£80bn
£20bn Trident nuclear how much of our collective economic output goes to the rich, yet
weapons
co-exists with a long-hours culture in which workers are so
£80 would save
others
stresseddothat
notmental
have enough healthto eat.
problems are on the rise.
£60bn
£0bn It
Weisdon’t
worthhave remembering
to live in athat after thebankers
last crisis of this
bn £80 billion
scale
world where gamble
(low estimate) millions across the world in elaborate financial casinos like
and significance, and with public debt something three
at the
£40bn and a half times the size it is today, we
same time as 1.4 billion people live on less than $1.25 a day.established the NHS,
55% HAS PUBLIC created the welfare
We don’t have tostate, live in put in place
a world comprehensive
where education
there is no limit to
SPENDING and
how built
mucha of vast ournumber
collective of public
economic housing
outputestates.
goes to the rich, yet
£20bn
SHOT UP? History tells us enough
that there is more than one way out of an
50% Public others do not have to eat.
£0bn spending as
economic crisis.remembering
It is worth n that after the last crisis of this
45% a percentage scale and significance, and with public debt something like three
of GDP Thanks to Drtimes
and a half Alex Nunnthe sizeof Leeds
it is Metropolitan University and
today, we established the the
NHS,
40% Transpennine Workingstate, Groupput of the
55% HAS PUBLIC created the welfare in Conference of Socialist Economists.
place comprehensive education
SPENDING www.alexnunn.net
and built a vast number csetranspennine.wordpress.com
of public housing estates.
35%
SHOT UP? History tells us that there is more than one way out of an
50%1970 1980 1990 2000 2010
Public
300% DEBT: OUT
spending asOF
economic crisis. n
The web version of this guide is published by Red Pepper (www.redpepper.org.uk)
red pepper aug | sep 2010 25
45% CONTROL?
a percentage in association with the Other TaxPayers’ Alliance (www.taxpayersalliance.org)
250% Today,
of GDP Thanks to Dr Alex Nunn ofunder
Published Leeds Metropolitan
a Creative University
Commons licence andcopy
– you may theand
40%
200%
250% government
debt is 70 per
distribute
Transpennine Working for non-commercial
Group purposes but
of the Conference please credit
of Socialist Red Pepper.
Economists.
www.alexnunn.net csetranspennine.wordpress.com
35% cent of GDP.
1970 1980 1990 2000 2010 During the
150% second world that there was at least a chance to overcome narrow self-interest
www.redpepper.org.uk
war it was 250 and look toward a more co-operative and sustainable future.
red pepper aug | sep 2010
4
25
100% per cent
of GDP
We are about to squander a once-in-a-generation opportunity
70%