Why we need public spending

David Hall, an internationally recognised expert in public service investment, privatisation, asset sales and public private partnerships, argues that public spending drives economic growth. Download his paper "Why we need public spending" here: http://www.psiru.org/reports/2010-10-QPS-pubspend.pdf

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- [Announcer] The
government's plan to sell off

state assets and cut public
services is a radical one

that will affect all New Zelanders.

But what is the evidence it will improve

the economy or benefit the
country in the long term?

Is New Zealand out of line
with other modern economies

with its weight of public spending?

Is our debt so high that the
government has no other choice?

David Hall, Director
of the Public Services

International Research Unit

at the University of Greenwich London

is an internationally recognized expert

in public service
investment, privatization,

asset sales, and
public/private partnerships.

He was recently in New
Zealand at the invitation

of the PSA to raise
awareness of these issues.

In a debate in Wellington,

he summed up the evidence
that shows public spending

is actually the driver of economic growth.

- So what I have to say starts by

simply talking about 140
years of human history.

140 years of economic
growth and development

in which the steady growth of economies

has been accompanied by a steady
growth of public spending.

Not just at the same speed as economies,

but rising even faster than growth.

In other words, as economies grow

they spend an increasing proportion

of national income on public services,

public spending, and so on.

So this is not something that
holds back economic growth.

It's something that
delivers economic growth.

In the world now we're
all currently spending

in the rich nations something
between 40 and 60% of GDP

on public spending.

Very high levels.

Sometimes people say it
should be lower than that.

Maybe we wanna get back to 20% of GDP.

That's where we were in the 1920s.

That's where some African
countries still are.

30% of GDP, that's where
we we in the 1960s.

That where a lot of South
American countries still are.

But modern economies are all in the band

of around 40 to 60%.

So this accompaniment of economic growth

by public spending is
because public spending

brings drivers of economic growth.

This isn't just absorbing it.

This is driving it.

And it drives it in
three or four key ways.

The first one is infrastructure.

Notoriously, private companies

don't invest in infrastructure.

The roads, the electricity,
the railway systems,

the telecom systems,
water and sewer systems,

all countries of the world
over the last 140 years

that investment has come
through public spending.

The second area is developing
what's sometimes called

the soft infrastructure.

The public services.

The big services of health, education,

libraries, et cetera.

The stuff that supports the growth

and development of people.

The stuff that supports and generates

an educated, competent workforce

capable of productive work.

As economies grow, the
demands get more complex.

You need more education.

You need more higher education.

And that's why services continue to grow

as economies grow.

Why do we do it through the public sector?

The answer, big surprise to some people,

the economic answer is
because it's more efficient

to do it that way.

Now the clearest way you can
see this is with healthcare.

And you can see it by looking at the USA,

which has carried out a unique experiment

of trying to run privately
financed healthcare.

The USA spends twice as much of its GDP

on healthcare as other countries,

other advanced countries.

It spends a sixth of its
national income on healthcare.

And it gets worse results.

And has the 33rd place in
terms of life expectancy.

It's poor in the USA.

Child mortality rates in the USA are twice

what they are in the Czech Republic.

So this is, this private healthcare,

is a system that's both
inefficient and ineffective.

If we look more broadly
across various sectors

we see that the evidence
from empirical studies

comparing the efficiency of
public and private operators

in water, electricity, accounting,

a whole range of services,

prisons, airports, the results come back,

again and again, there's
no significant difference.

This is reality.

It's not what people, many people believe

or assume or expect.

But the reality from
the empirical evidence

is there is no superior efficiency

from private performance.

So the third element of efficiency

working in favor of the public sector,

and this is particularly relevant

to the issue of PPPs for example

is raising of finance,

because the public sector
can always raise finance

more cheaply than the private sector.

It raises finance more cheaply

because our collective readiness

to carry on paying taxes
is a stronger underwriting

than any enterprise can deliver.

So we have efficiency as a core function

that the public services and
public spending are delivering.

How can we afford this as economies grow?

How can we afford to spend more
and more on public services?

The answer's simple.

It's the same way we can,

we afford to spend more and more

on television, mobile phones, et cetera.

It's just that the things we get,

the things we need in
terms of infrastructure,

healthcare, education,

we have to get through public spending.

We can get it most efficiently
through public spending.

So rather than spending it out
of our own pockets on that,

we spend increasing
amounts through taxation

and public spending on that.

The other thing we get
out of public spending

and public services is greater equality.

In all societies, in market economies,

the initial distribution
of income is very unequal.

Taxes and benefits go a long way

to redistributing that.

So the poorer get more
from where they started.

But the other elements of redistribution

is public services themselves.

By providing education,

healthcare, and other services,

we're providing enormously valuable things

to people who otherwise
wouldn't afford them.

And for example in the UK

for the poorest 20%,
those services are worth

almost as much as their
entire monetary income.

So equality has a big social advantage.

It also has an economic advantage

because it redistributes money to people

who spend a higher percentage of it.

So it means that there's
more demand in the economy

than there would be if it
remained with the rich.

One result of all of
this is that it sustains

high levels of employment.

And we've done a rough estimate

that about 50% of all
the jobs in the world

are supported by public spending.

That's not just by direct employment.

By public employees.

For every one public employee

supported by public spending,

there's two private sector employees.

Because governments purchase goods

from the private sector
and the multiplier affect

of those employees to those employees

generates furtherward.

So for every one public sector job

you have two private sector jobs.

Sometimes this catalog of achievements

of the public sector isn't enough,

and people say, oh, it's not innovative.

And I suppose that's right

if you don't count inventing computers,

the internet, space travel, jet aircraft,

and penicillin (audience laughing).

All of which came out
of the public sector.

Okay, but has the economic
crisis changed all this?

Has the economic crisis
shown us we can't afford

to do this anymore?

I think not, and I think not
for some very strong reasons.

The first is and a big
reminder to all of us,

the economic crisis was not
caused by government spending.

It was not caused by government borrowing.

It was not caused by government debt.

Anywhere in the world.

Government debt in the
world was level for 10 years

before the economic crisis.

What caused the economic crisis

was unsustainable levels of private debt.

And irresponsible behavior
by impeccably private banks.

How did we rescue
ourselves from this crisis?

Well, it was by using public spending

to nationalize in many cases

those irresponsible private banks.

We used huge amounts of money to do that.

The money we spent
nationalizing those banks

was the equivalent of all the revenue

from all the privatizations
in the whole world

over the last 30 years.

That's what it cost us
to prop up those banks

and stop them failing.

We then went further,
right across the world,

in an unprecedented coordinated
act of economic policy,

deliberately increasing public spending,

deliberately increasing
government deficits,

in order to boost demand,

in order to stop unemployment
rising even faster.

That worked.

Unemployment would be far worse worldwide

if that hadn't been done.

It meant that public spending
and government deficits

worldwide went up by the
equivalent of 4% of GDP.

But we thought that was
a price worth paying,

and we still should think that's the price

worth having to pay.

What happens now?

I think that the crisis is not yet over.

The threat of recession is not yet over.

This is not a time to
be starting to cut back

on public spending.

We still need it to protect us.

Is privatization, or PPP,

some kind of substitute in some way?

Well, you've had as up
and down an experience

with privatization as
any country in the world,

so, I won't go through the
details of that experience.

Perhaps some of the other panelists will.

But I will say something about

the idea that partial privatization

can somehow result in a sort of

mom and dad's popular
ownership of industries.

Because that's what we thought in the UK.

That's what Mrs. Thatcher
thought in the 1980s.

And we were all sold shares

in these new privatized companies.

But what we all then did,

because we're fairly smart investors,

is that when big companies
came along and said,

we'll give you 25% more for those shares,

we sold them to them.

And as a result, the privatized companies

in the UK are now owned,

to a very large extent, by
foreign based multinationals.

They're owned by French
companies, German companies,

Spanish companies, Chinese companies,

Malaysian companies,
Singaporean companies.

So beware of the illusion
of selling shares

to small shareholders.

What also happens to prices
is that you get increases.

And in water, for example 15% increases.

So finally, to wrap up,

I would say that we
need public spending now

as much as ever.

We need to hold our nerve.

It's rescued the world economy

from the worst crisis.

We need it now.

We need it in the future.

And we're gonna need it
for future needs as well

like combating climate change.

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