Cutting public jobs will shrink the economy

There is a myth about public spending which is sustained largely through right-leaning newspaper editorials and op-eds – that public spending is a cost. Therefore for a loss of 20,000 civil service jobs is a direct win for people who do not believe in the merits of public spending.

So the news today that the IPPR think tank is warning that Scotland is likely to lose 20,000 public sector employees by the end of the decade to help close what is presented as a £4.7 billion pound 'black hole' in the public finances will be greeted positively by a range of right-leaning commentators. This is to fail to understand the consequences.

The IPPR paper itself focusses on the impact of services. It highlights a range of popular policy decisions (such as expanding free childcare) which are labour-intensive and cannot be rationalised or delivered with significantly fewer staff. It points out that cuts of this scale do not take place without a loss of front-line services.

There is plenty reason to be sceptical about the proliferation of managers and administrators in the Scottish public sector and Common Weal has regularly criticised an expanding governing class which at times appears to be there mainly to increase levels of control and surveillance on frontline workers.

But you do not rationalise those roles through arbitrary job cut targets but by reforming the processes of government. In fact it is likely that blanket job cuts will proportionately affect frontline jobs simply because the decisions are made by back-office policy staff.

It is what the IPPR report does not cover which is significant. The right-leaning opposition to public spending requires it to ignore the lessons of Keynesianism – public spending is not just about the purchase of labour to expand services, it is also about managing the economy and stimulating growth.

The average civil servant in Scotland sits in a pay range from about £30,000 to about £45,000. At that salary the civil servants in question will pay about £7,500 income tax each every year, or about £150 million each year collectively. That tax revenue is lost.

Moreover, the vast majority of their other spending will also go into the domestic economy. That spending will go on (in declining order) housing, discretionary spending and leisure (including eating out, hospitality and socialising), food, utilities, Council Tax and transport.

In total the loss of monthly spending from each civil servant will be around £2,500, or close to £50 million a month in total, or £0.6 billion a year. And of course for each pound they spend in a pub or a restaurant, that business spends as proportion on wages, in a supply chain or in bills – and so on. This is known as a 'multiplier' – the impact of one pound of spending multiplies as it moves round the economy.

Multipliers are notoriously difficult to assess because the cascading effect through supply chains is difficult to measure (it is much higher if you spend on wage-and-materials-heavy activities like eating out than if you pay your mortgage). The standard range for a multiplier is 1.5 to 5 – i.e. for each pound you spend it ends up having between £1.50 and £5 total impact on GDP.

So taking even the most modest assessment of the total impact of these cuts, it is likely to be in the order of £1 billion cut to GDP, or a full half-point cut in annual GDP figures. To put that in perspective, that is how much it is predicted the Iran War will reduce GDP this year.

Now this is all complicated; in standard neoclassical economics the loss in GDP from these job losses is recovered because the people who were originally taxed to pay for the jobs will spend that money in the economy instead, having the same effect.

Unfortunately neoclassical economics wrong – because inequality means that it is a small group of people at the top of the income spectrum who will gain most from this and they are by far the least likely to spend it in the economy, instead investing it in pensions or wealth funds which in turn export wealth to wherever it is eventually invested (which is probably unlikely to be Scotland).

None of this is straightforward and no-one is arguing that there is no such thing as 'too many civil servants' or that perpetually expanding the public sector will always keep growing the economy. But cutting it without seeing the private economy stepping up to fill the gap (which seems unlikely in current economic situations) it will have real effects.

The right wing press may well cheer the loss of these jobs, but it will then bemoan the resultant loss of GDP – without connecting the latter as being an outcome of the former policy choice. There is no consequence-free cut of spending. That is the reality, and Scotland should not pretend otherwise.