The fiscal crisis of the state
Tim Worstall raises an interesting point. Counter-cyclical fiscal policy, he says, requires that governments run budget surpluses when growth is above trend, not just deficits when it’s below. But, he says:Can anyone really believe that was going to happen? When you've Polly Toynbee screaming that we can and must abolish child poverty for only a few billion more? When every policy panhandler is pronouncing on how this or that evil of the world can be solved for just a little more taxpayers' cash and anyway, isn't this what a Labour government is for?…If it's politically impossible to have fiscal contraction when the theory says that there must be fiscal contraction then it's not all that useful a theory, is it?This raises a question : why is (or was) a fiscal contraction impossible? One trivial possibility is just that Labour was stupid. Another, coming from public choice economics, is that politicians win more votes for spending money than raising it. But there’s a third Marxian possibility, which is overlooked. I’m reminded of James O’Connor’s The Fiscal Crisis of the State, written in 1973. State spending in a capitalist society, he said, must fulfil two functions: to raise profits, for example by maintaining aggregate demand; and to legitimate the system by ameliorating inequalities. But, he said, these forces for higher spending increased faster than people’s willingness to pay tax. The upshot was a tendency to bigger budget deficits, even in decent economic times.You could argue that New Labour has been trapped by just these forces. First, growing market-generated inequality in the 80s and 90s meant that it perceived a greater need for “legitimating spending.” In promising to reduce child poverty, or spend more on the NHS, New Labour was trying to show that capitalism could work in everyone’s interests.Second, there was also a greater need for “profit-enhancing” spending. A key theme of New Labour’s was the need to raise the skills of workers in order to compete in a global economy. That meant increased education spending. But at the same time, there’s been pressure on it to use public money to increase corporate profits directly, via public-private partnerships, big military projects and lavish IT spending.Third, the tax base has been eroded not just by popular opposition to higher taxes - twas ever thus - but by the increased globalization which means corporate taxes must be held down to stop companies moving abroad.Put these pressures together and we have, in new form, just what O’Connor predicted - a tendency for budget deficits to increase, whatever the state of the economic cycle.Now, I’m not offering this as a definitive, or even correct, analysis. All I’m saying is that it might be too simplistic to attribute the fact that the government borrowed money even in good times to mere New Labour profligacy. It could be that the forces for budget deficits are simply much stronger than people realize.