Public spending and the social contract 

Raising the rate of domestic economic growth, against the background of a global economic recession which may well be worsened by the current downturn within China, cannot have been the main rationale for the Truss and Kwarteng’s ‘fiscal event’.  The underlying purpose was to force public spending cuts, to shrink the size of the state and to make it more difficult for a successor government to raise taxes sufficiently to restore the social democracy that adequate public spending underpins.  Simon Clarke, now ‘levelling up’ minister, has specifically remarked on what he sees as the over-extension of the UK’s welfare state.

If current ministers were serious about introducing supply-side reforms they would recognise that public investment is needed to repair current inadequacies.  Low productivity is partly the result of inadequate education and training, most evident in basic skills for our domestic workforce.  Years of under-funding for pre-school support (yes, we should have fought harder against the coalition’s killing of the ‘Sure Start’ programme), for state schools and further education colleges, are to blame.  But as the Conservative chair of the Commons Education Committee has just protested, the new government has only talked about grammar schools and entry to Oxbridge so far, leaving education and training for the vast majority of British citizens to one side.

The UK has a lower proportion of its population in work or looking for work than many other advanced countries.  That’s not just due to the rising number of retired; it’s also because we have such a high proportion of people under 66 who are unfit for work or long-term unwell.  Underfunding of the NHS, and in particular of public health programmes that focus on healthy lifestyle, explains a good deal of this.  Lengthy waiting times for treatment translate into absence from the workforce.

Then there’s public infrastructure.  I recall a discussion in a parliamentary committee room about reinstatement of closed rail lines in northern England, in which an executive from Skipton Building Society was explaining that they could not find enough staff within easy reach of Skipton, but that north-east Lancashire has a high rate of unemployment and one of the country’s lowest levels of pay from which people might commute to Skipton – if only it was easier to get there.  Those of you who live around London and the South-East may not understand quite how poor (and expensive) public transport is in many parts of the north of England.  Investment in urban and inter-urban public transport (not just on roads) would spur faster growth.

There’s a lot of ministerial rhetoric about the UK having the highest level of tax for 70 years, as a justification for cutting back.  No mention of our ageing population and the implications for pensions, health and social care, nor about the larger sums our competitors spend on research and development and education to support innovation.  Nor that Germany, the Netherlands and the Nordic states all have significantly higher rates of tax and public spending, and more successful economies as well.

Gerald Lyons, one of the minority of economists sympathetic to Liz Truss’s approach, has made one of the most telling critical comments this week.  He warned that cuts in benefits would damage ‘the social contract’ between government and citizens.  That’s a phrase we should be using as often as we can.  Democratic government rests upon an implicit contract between citizens and the state, in which the state provides security, education and welfare for all its citizens in return for loyalty, taxation and public service.  A state that neglects the poor and disadvantaged loses its legitimacy, and has to rely on force to survive.  The United States is the only developed democracy where this is contested, and suffers from higher rates of crime and violence as a result.

Liberal democracy also requires social democracy.  Shrinking the state risks shrinking social order.  We should be making that case, loudly and clearly.  And adding that there’s no evidence that cutting public spending below its current level accelerates economic growth, either.

* William Wallace has fought five parliamentary elections in Manchester and West Yorkshire. He is a former president of the Yorkshire regional Liberal Democrats.

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31 Comments

  • Neil James Sandison 5th Oct '22 - 1:00pm

    I would agree with Lord Wallace about transport it is easier to travel by train to London Euston from Rugby than to travel by public transport to neighboring market towns in Warwickshire . This in turn reduces social mobility and economic activity .

  • Jenny Barnes 5th Oct '22 - 2:25pm

    I’d say that the tories in aiming for a “small state” are more likely to achieve Mogadishu-on-Thames than startling growth. Anyhow, we can’t afford growth if we want to continue to live on this planet.

  • Lorenzo Cherin 5th Oct '22 - 2:46pm

    It says a lot about Lord Wallace that he regularly offers sense and insight here, much valued.

    I agree with the emphasis here but we must say it more than any because the wretched Tories backed this Liberal and Social Democratic Party into positions that its philosophy and people, the members disliked and do and shall yet!

    This is the most nasty govy in generations. I think William is correct on their motive, but what a terrible thing, massive borrowing for help for the very rich , with desire for cuts to the income of the poor.

    And by the way, in most states today the benefits in the US are far better than here, especially so for out of work who are less demonised there now, since Covid, and better regarded as trying not presuming them lazy as from this ghastly attitude here.

  • “The wretched Tories backed this Liberal and Social Democratic Party into positions…….”.

    To the best of my knowledge, the Liberal Democrat M.P.s and Leadership chose to enter Coalition of their own free will. They didn’t have to do it.

  • Geoff Walker 5th Oct '22 - 3:05pm

    The Lib Dems in coalition deserve more credit for raising the tax thresholds. This is of more benefit than reducing tax rates. It needs fewer civil servants to administer and leaves more money (proportionately) in the pockets of the less well off.

  • William Wallace 5th Oct '22 - 3:50pm

    Jenny: the whole debate about moving from conventional assumptions about growth to a sustainable economy is one we should be pursuing, but which requires a lot of further thinking through. Shifting assumptions about energy generation and use are helpful; so is the changing debate on land use and soil regeneration; but we’ve hardly started on future housing needs yet. Incidentally, if the Tories want to put growth above all else, their first priority should be to regain access to our most important overseas ‘single market’ – something that Liz Truss has NOT mentioned.

  • Jenny Barnes 5th Oct '22 - 4:18pm

    ” moving from conventional assumptions about growth to a sustainable economy”
    Yes, it does need a lot more thought than it seems to be getting. In my local area I have noticed half a dozen “Tern” electric bicycles – these look like car replacements with maybe a couple of child seats and big panniers for shopping. Living near a primary school, one mum delivers her child using a cargo bike, one has a trailer… I did my weeks shopping with my shopping trailer behind my bike this morning. These are all small changes, but it seems to me that one can be perfecly happy not driving a 3 tonne SUV and still get things done. Not everyone, ofc, can cycle, but Dutch experience says that a lot more could than do in the UK. Other changes are needed too.

  • Barry Lofty 5th Oct '22 - 4:29pm

    This Truss government continually speak of our need for growth in the economy but as Lord Wallace points out never mention one obvious source of growth the single market and our relationship with our European allies and friends which have been severely damaged by the same group of politicians promoting this seemingly very important part of their agenda.

  • Mick Taylor 5th Oct '22 - 4:50pm

    William is, as very often, correct. The real problem is that the lunatics have taken over the Tory Party. Their agenda is so alien to any sane person and we have to suffer their madness until late 2024 and the amount of damage they can do the UK in 27 months is incalculable.
    It doesn’t help that our party leadership is not pushing the obvious solutions, choosing instead to to focus on relatively unimportant things like departing minister’s salaries (which of course our departing ministers had access to in 2015 and I suspect they took). When we should be speaking out about the single market, our leader never mentions anything even vaguely related to the EU as if it just doesn’t exist. We never say that tax (as GK Galbraith eloquently argued) is the entry price for a civilised society and that cutting taxes and public services will lead to a very uncivilised society, a very unequal society and possibly a very disrupted society and it won’t in any event achieve growth even if that what was wanted.

  • The odd thing about the ‘fiscal event’ is that I’ve not heard anyone, Truss, Kwarteng, libertarian economists or the media, attempt any explanation of how it’s supported to deliver growth. So, what is the mechanism?

    It seems we are supposed to take it on trust; to believe, for instance, that a director of a substantial company, ‘earning’, say, £1million will somehow work harder/longer/smarter because of their higher after-tax ‘earnings’ (especially with no 45% rate as originally proposed). And if that’s not it, what is?

    If the Truss approach worked everyone would be trying to move to the World’s banana republics. Strangely, (/sarc) they’re not.

    We (the royal ‘we’), do in fact know how to make a country more prosperous and, with that, more at ease with itself. That’s now a reasonably well-trodden path and, I would wager, one that has all sorts of spin-off benefits like better mental health that are tough to address directly.

    @ Mick Taylor “the lunatics have taken over the Tory Party”

    Indeed, they have. Chris Grey, who has long published a weekly blog on things Brexit (and now Beyond), wrote a particularly fine demolition of Truss & Co. last week.

    https://chrisgreybrexitblog.blogspot.com/2022/09/the-week-wheels-came-off-brexit-britain.html

    So, why does our leadership insist on playing only in the little league? What can we do to change that?

  • William Wallace 5th Oct ’22 – 3:50pm:
    Incidentally, if the Tories want to put growth above all else, their first priority should be to regain access to our most important overseas ‘single market’ –

    This would be the ‘single market’ which uses 24 different languages requiring a multiplicity of labels, packaging, advertising and marketing. We already have full 100% tariff and quota free access…

    ‘UK trade: April 2022’:
    https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/bulletins/uktrade/april2022

    EU exports have increased for the third consecutive month in April 2022 and are at the highest levels since records began.

    When we were a member of the EU ‘single market’ the big growth was in our EU trade deficit…

    ‘Why has the UK trade in goods deficit widened in real terms?’:
    https://www.ons.gov.uk/economy/nationalaccounts/balanceofpayments/articles/whyhastheuktradeingoodsdeficitwidenedinrealterms/2018-09-24

    From 1998 to 2000 the UK had an average £3.5 billion trade in goods surplus with the EU. In 2001 the surplus turned into a deficit and by 2017 the trade balance with the EU was £93.7 billion in deficit with most EU countries contributing to the deficit.

    For export led growth the UK needs to be free to make comprehensive Free Trade Agreements with fast growing economies around the world (based on mutual recognition rather than the EU model of regulatory imperialism). We now have FTAs covering 98 countries (27 EU, 71 non-EU) – more than any other country or customs union. The UK’s accession to the CPTPP will make it the world’s largest free trade bloc.

  • And, Mick Taylor too, “ is, as very often, correct”.

    ‘Campaigning’ on bland neighbourhood grumbles and Tory failures alone wins very few prizes in a general election. Time for some red blooded radicalism about inequalities in modern society, and pursuing what used to be a central plank of Liberalism when I first joined the party back in the early sixties….. the need for industrial co-partnership and industrial democracy ……… however difficult that may be to achieve in a world of offshore billionaires running the economy.

  • This was the reality of our membership of the EU ‘single market’…

    ‘The EU is a Major Drag on the UK economy’:
    https://www.briefingsforbritain.co.uk/the-eu-is-a-major-drag-on-the-uk-economy/

    In the twenty years from 1998-2018, the volume of goods exports to the EU rose by just 23% or 1% per year, and from 2007 they have grown less than 3% – or a pitiful 0.3% per year (chart 2). By contrast, UK exports to non-EU destinations have grown strongly, by around 3.5% per year since 1998 (almost four times faster than exports to the EU) and 3.3% per year since 2007 (thirteen times faster). […]

    It is also the case that a 1% rise in demand in non-EU countries has around double the positive impact on UK exports that a 1% rise in EU demand has. UK exports appear to be structurally better suited to non-EU markets than to EU markets. […]

    …94% of world growth in the next two decades will be outside the EU, along with the great majority of economic opportunities for the UK. […]

    Overall, the above analysis shows clearly that the EU has, over the last two decades, failed to provide the kinds of benefits that proponents of EU membership promised from the 1960s onwards. The EU’s anaemic GDP and productivity growth has hobbled UK trade and manufacturing, while UK consumers have suffered by being forced though the EU customs union to buy overpriced EU products.

  • Lorenzo Cherin 5th Oct '22 - 7:29pm

    David

    Yes but a very obvious effort by good members of that govt to improve it were met with right wing rubbish.

    Sorry to say it but what is the excuse of Rachel Reeves during the said era saying she and Labour ought to be tougher than the Tories on people on benefits and Labour are not the party of those who’re unemployed?!!

    All three parties awful often. The Liberal Democrat awful less the Tories worst!

  • Katharine Pindar 5th Oct '22 - 7:29pm

    William, I am very glad you have raised the Social Contract idea in your excellent article. Since it is about the rights of all citizens in Britain, there is no obvious reason why the fanatics for British sovereignty and independence should not accept it. Except, of course, that right-wingers tend to have no conception of fairness as we see it, but will let the market rule regardless of the ‘little people’ who may be crushed.

  • Steve Trevethan 5th Oct '22 - 8:02pm

    How can Labour and/or the L Ds present a useful and valid opposition when they have the same disastrous economic policy, namely Neoliberal Economics, as the party in power?

  • @ Lorenzo Cherin. I’m afraid I don’t recognise the comment you attribute to Ms Reeves, and from what I know of her it sounds very out of character.

    A correct and accurate reference with date etc., would be appreciated.

  • Lorenzo Cherin 5th Oct '22 - 10:40pm
  • Robin Stafford 6th Oct '22 - 9:15am

    Well said by William Wallace. The health of the nation in every sense is underpinned by the strength of our public services which have been steadily undermined by a succession of Conservative governments.
    I’d like to see a lot more forceful messages and policy from the party to make it clear that we really do value strong public services. The party seems a bit ambivalent with its suspicions of a strong state coming across as a lack of support for strong public services. Given 20 or more years of failing privatisations and PFI it should be clear by now that the ‘market’ is not always the answer.

  • William Wallace “Incidentally, if the Tories want to put growth above all else, their first priority should be to regain access to our most important overseas ‘single market’”

    I think William, you’ve misunderstood Truss et al. I suggest to her clique, its a rerun of the 1980’s…
    Fracking instead of North Sea oil and gas – note how the focus is on the estimated value – namely £4tn as it will be sold on the world market (take note those who think fracking will be used to make the UK any more energy secure – you are deluding yourselves).
    Financial services and Property. And Ukraine standing in for the Falklands.

  • George Thomas 6th Oct '22 - 11:31am

    This government broke the social contract when Zach Goldsmith was voted out of office but ended up in House of Lords and in The Cabinet regardless because of who he is friends with.

    The “contract between citizens and the state” was breaking with long years of austerity (Nick Clegg has a lot to answer for) and focus on brexit over emerging crisis (climate, crumbling public services and ageing population) but the Zach Goldsmith issue broke it completely.

    The biggest reason there is no widespread disorder already is because of the social contract between us as citizens as members of our communities. If things become so desperate, as Liz Truss is threatening, that we enter a Hunger Games situation then there will be much higher risk of disorder.

  • Nigel Jones 6th Oct '22 - 11:32am

    Robin Stafford: “the ‘market’ is not always the answer”.
    Well said, especially with the word ‘always’; I remember when the telephone service was privatised and BT took over, it improved a great deal because under state control it was expensive with a poor service. On the other hand when deregulation came for bus services, our local bus service was destroyed by competition
    within a few years and has never recovered.
    Lorenzo: regarding Rachel Reeves, her views of long ago seem to say that with government funding there would be a jobs guarantee, so that all who can would be offered a job and penalised if they did not take it; that has risks but it does not sound so bad to me. There should be plenty of scope for jobs in the public sector at the moment.
    William: In line with your comments about education and public services you are putting a strong case for improved skills, better jobs and therefore better quality better paid people in the public sector. This would simultaneously improve public services and they would lead the private sector to do the same to improve both productivity and people’s incomes. As to education and skills, John Major once said it should not be counted as government expenditure but should be called capital investment.

  • Lorenzo Cherin 6th Oct '22 - 11:52am

    Nigel

    If you scratch that veneer of toughness there may be some element of sense and consideration there. But crass and cruel headline comments are not fake, she said what she said. The sources are inumerable and left leaning and reliable and caused good moderates like the one I reveal there to recoil. That direction of travel was wrtong and unnecessary. She said Labour at the height of the coalition would be tougher on benefits than the Tory party. And three years later though talking rightly about the mistakes of the govt, dobled down on the rhetoric and saying that Labour are not a party for the unemployed! Tell that to the Jarrow marchers and the like!

  • Neil James Sandison 6th Oct '22 - 5:34pm

    Should we start with a wedge to drive moderate conservative voters who would think of themselves as one nation conservatives into our ranks? We continue to support a mixed economy with private enterprise and social responsibility as cornerstones of a modern state. We still support as they do certain services remaining in the state’s hands like the NHS. We still expect good regulation well monitored and overseen rather than lax and ineffective regulation softening up the public sector for ideological
    commercialization .

  • Rachel Reeves has also recently made awful comments encouraging the government to speed up the deportation of failed asylum seekers. Does she not think this govt are right wing enough already?!

  • If the NHS wasn’t so outdated and thoroughly inefficient and people didn’t have to work 12 hour shifts, being a waste of space after 5 hours, not to mention ruining their home life and producing wild kids or kids who don’t know how a normal society functions it might help. People just don’t know how to behave any more.

  • Robin Stafford: “the ‘market’ is not always the answer”.

    Quite correct, the ‘market’, as defined by marketeers, only ever responds to events.
    It wasn’t the ‘market’ that gave us personal computers, Internet and mobile phones for example, it was people who had vision, just as we need vision to move forward to create a better more inclusive society.

    An example of the ‘market’ is all the new ways of buying a car, none of them are actually delivering anything transformational or visionary, they are just improving customer service and the purchasing experience.

  • Katharine Pindar 7th Oct '22 - 1:48pm

    Martin, the social contract applies to everyone in our society. It is the understood but not laid down principle of mutual responsibility between the citizen and the state, as interpreted by the government. The state protects and gives security, the citizen obeys the laws and respects the rights of fellow citizens. It is an unwritten contract which was understood by William Beveridge and governments after the Second World War. But the UN Rapporteur on Extreme Poverty and Human Rights, Philip Alston, after his visit and enquiries of November 2018, when he saw the poverty of 14 million people in our rich country and the indifference amounting sometimes to callousness of the government towards its citizens struggling to cope, declared that the post-war social contract appeared to have been broken. It is certainly under threat again now under this new government.

  • William Francis 10th Oct '22 - 6:36pm

    An under-appreciated aspect of the problems of shrinking the state, is that the state gets larger in other ways to deal with social problems.

    Is the state truly small if it spends more on coercion and officials to do means testing, as opposed to being more generous with welfare? Is it a small state that uses benefit sanctions to get the unemployed to work, rather than keeping and maintaining a tight labour market?

    In my mind, a smaller state is not one that taxes more, but one that uses coercion less.

  • @William Francis – well put; repressing and coercing people is expensive and does nothing positive for society.

    I’ve always thought our benefits system was too much stick and not enough carrot. I would suggest a better system would reward work and only really start to become more regressive once people were earning above the living wage.

    For example:
    Unemployed, just get benefits. Get a job get benefits for a year plus pay, second and subsequent years start to taper benefits – so you are always better off in work.

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