Is public spending elbowing out private endeavour?

Chris Bowlby takes a look at spending in the public and private sectors

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Which is the most important part of the British economy – public or private sector? Can one sector harm rather than help the other? When the chancellor, George Osborne, warned last year of public spending “crowding out private endeavour” he was firing the latest salvo in a long dispute about the balance between different kinds of economic activity – a debate which can be traced back centuries.

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As Professor Jim Tomlinson of the University of Dundee points out, the idea of ‘crowding out’ came to the political fore in the 1970s, as part of a wider debate about how far government should continue to intervene in the economy. The suggestion was that governments borrowing money to fund the public sector would elbow other borrowers out of the market or force interest rates up, thereby reducing private sector activity. But this was much more than a merely technical debate. Those putting forward this theory, notes Tomlinson, also drew on a much older idea (going back to the 18th century) that while some who are economically active contribute to building national prosperity, others drain it.

And versions of this debate can be traced in different guises through the 19th century. Sceptics asked how far different kinds of activity contributed to satisfying human needs and desires as opposed to merely making money. Economic arguments were mixed with cultural concerns about, say, craft activity and its increasing replacement by industrialised manufacture.

In the 20th century, as state power expanded, debate about good and bad in the economy came to focus more on public spending versus private investment. Whereas state spending could be seen as providing the conditions and infrastructure in which private enterprise could prosper, others were more inclined to see the two sectors as rivals for resources and human talent.

The public sector appeared to have the upper hand in mid-century. It provided public services and nationalised industries such as mining and railways, seen by official statements as having “wider obligations than commercial concerns” in their contribution to society. The views of the eminent economist JM Keynes – that government could and should counter economic cycles, protect employment and stimulate economic growth through public investment – triumphed over what Keynes criticised as the narrower “Treasury view” that more should be left to the private sector.

Geography shaped views too. Government concentrated nationalised industries and public sector activity in areas such as the north of England, which was struggling to attract private sector investment in the face of greater competition from imports and the decline of heavy industries.

But by the 1970s criticism was mounting of what was seen as an over-powerful state dragging the economy back. One complaint, Tomlinson notes, was that the public sector was “absorbing too many of the highly skilled and educated”. The brightest and the best, it was assumed, wanted secure jobs in the civil service rather than risk-taking business roles.

That concern was also related to the long debate about whether Britain had lost the entrepreneurial spirit that had driven growth in the Victorian and Edwardian eras.
Before long, however, huge City of London pay-packets were luring top graduates away from public service. And that expansion of financial services undermined the ‘crowding out’ claim that public spending was denying investment cash to private enterprise. In an increasingly deregulated world, far more money was available to all – at least until the recent credit crunch.

Now, in the anxiety of austerity, we have new versions of these old debates about what kind of economic balance is most desirable. Should we promote manufacturing over financial services? Should parts of Britain more dependent on the public sector be sustained by the state, or made to change? What history tells us is that these debates are never just about numbers. They reveal our deeper hopes – and fears – about what economic activity is really for.

Chris Bowlby is a presenter on BBC radio, specialising in history. You can read more of his work at www.historyextra.com/feature

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This series is produced with History & Policy. You can find out more about them and read their papers at www.historyandpolicy.org