PUBLIC DEBT RATIONALISATION
Will Big Society Work? The simple logic of Economics
The Conservative-led coalition in Great Britain has outlined an interesting fiscal policy that relies on public expenditure cuts in anticipation of a shift towards more voluntary contribution by the society. However, basic economic theory proves that this set of assumptions may actually prove to be of very little relevance in practice
Issue Date - 15/12/2011
The concept of “Big Society” is an important and appealing issue characterising the current coalition government in Great Britain. The Conservative Party has won a relative majority at the 2010 United Kingdom general elections by presenting a platform aiming at massively reducing the role of public spending, motivated by an ideological passion for bringing public services back to ordinary people and relying on volunteering instead of fiscal policy for their funding. This is certainly desirable, but it is worth checking if this ideology, like many others of the past, passes the test of the dry logic of the “dismal science”, i.e. the somewhat unpleasant economic theory.
A lot of informal arguments and anecdotal evidence have been raised in favour and against the desirability or feasibility of this project, and after one year of governmental implementation, evidence seems to be still quite mixed on its chances of success.
Along with striving to promote the grand project of Big Society, the British government is also engaging in the biggest wave of public spending cuts ever experienced so far in the UK. While fiscal consolidation finds motivation from the international financial and macroeconomic conditions, the huge budget cuts and the increase in volunteering activities seem to be so strongly tied to it that it becomes important to see if their relationship is supported by rigorous economics or not. In fact, according to the government, the budget cuts are not going to be temporary, as the financial instability argument might suggest, and the Big Society ideology is what should support their persistence.
Therefore we need to test the following logic of argument: government budget cuts should lead to increased volunteering activity, which would therefore compensate the local communities of the potentially negative social effects of the reduction of public services. Fewer paid policemen would entail more tax savings, while encouraging more voluntary constables; fewer paid nurses would encourage more health support by altruistic carers; less litter collection by councils would stimulate families to spend more time cleaning parks et al.
Under the basic premise that the individuals are not only selfishly motivated, but instead they also like to spend some of their spare time providing “good things” for free to other individuals, economics should help clarify if direct and indirect effects of the budget cuts will eventually induce them to spend a larger or a smaller fraction of their time volunteering.
The most important long term effect of the massive reduction in government expenditure is a persistent decrease in income tax rates. This is what many voters are hoping for the future, after this highly painful transition, and it would be the coronation of the success of a Conservative economic policy in any country in the world. Of course the Labour Party, more interested in income and wealth redistribution from the rich, may not always see this as a success, but I am abstracting here from income or wealth inequality in society, and only want to focus on average economic variables.
According to macroeconomics, public debt is just a way to procrastinate taxation, which will eventually repay the debt, either via higher tax rates or via more inflation – in case debt is bought by the central bank and new money is issued. Reducing public debt may entail more taxes now, but will eventually lead to lower taxation in the future. With lower income tax rates, the workers would be able to appropriate a larger part of the income they produce. This is the first and fundamental form of reappropriation by productive individuals of their contribution to production.
Economics predicts that under normal circumstances, individuals who can appropriate a larger fraction of their labour income would be encouraged to work more: leisure time would cost more in terms of foregone wage incomes – if they are employees – or of earnings – if they are self-employed. With higher tax rates, instead, they would appropriate a smaller part of their labour incomes, thereby reducing their incentive to work: higher taxes make leisure less costly, thereby discouraging work effort and encouraging non-paid activities.
Since volunteering and related Big Society activities are by definition undertaken out of the workplace, basic microeconomics predicts that they would be encouraged when taxation is high. When income tax rates are low, the activities that characterise Big Society become more costly: one more hour or day spent in voluntary litter patrols, caring for the old or the disabled, voluntarily engaging in civic action, or when “people come together in their neighbourhoods to do good things” would imply losing the opportunity of using that same hour or day to earn a higher net income in formal – more pecuniary – paid labour activities. Therefore, taking a macroeconomic perspective and considering the aggregate of all individuals, we predict that the provision of public goods and services by the average citizens in their spare time will decrease if structural public spending cuts are successful, while these activities will increase if public spending and taxation get higher.
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