It was a good week for black holes. On the day that another £25 billion was poured into the black hole outside Edinburgh formerly known as the Royal Bank of Scotland, the Auditor General. Robert Black, forecast a £3 billion black hole in the Scottish budget over the next three years. The latest mega bung to the banks merited hardly any comment; the hypothetical Scottish spending deficit was heralded as practically the end of civilisation as we know it.
Politicians and press vyed with each other in calling for savage cuts in spending, so that we can “learn to live within our means” - while, er, blowing tens of billions on worthless bank assets. Financial commentators seem to get some kind of perverse thrill out of calling for public spending cuts. Slash the lot! Get rid of free personal care for the elderly - it just keeps old people alive longer. And scrap free prescriptions, free school meals, the programme to cut class sizes. It’s all waste, waste, waste. There are far better things to spend public money on than children and the sick, like nationalised bank bonuses .
The actual money spent on these supposedly ‘spendthrift’ policies is a drop in the bucket compared to the colossal sums being handed to the banks. Together they cost less than half the one billion RBS wants to pay in bonuses this year to its staff as a reward for screwing up the British economy. It seems blindingly obvious that this is an irrational and morally inexcusable use of public money. But people find it hard to make the connection. There is a kind of fiscal myopia that afflicts politicians and commentators when it comes to public spending. There is also a deeply ingrained prejudice against the state - a belief that all money spent on public services is by definition a drain on the productive economy. But at least money put into the public sector has the virtue of employing people - and employed people spend money on things, thus stimulating economic activity.
About 60% of Scottish GDP comes through the public sector and about one in four employees are employed directly by the state, mainly in the NHS and education. Many more jobs are in firms dependent on public sector contracts and in service industries that depend on public sector salaries. Yes, there are too many public sector bureaucrats pulling down big bonuses and there is a lot of structural inefficiency in our fragmented and uncoordinated local government system. But the vast majority of public sector employment is useful and productive. Certainly, if you were to cut the public sector tomorrow by the levels suggested by Robert Black’s auditors, there would be a significant and immediate economic slump.
So, here’s a thought: why not divert a few hundred million a year from the £45 billion now being poured into RBS's toxic waste dump in Gogarburn and send it down the road to the Scottish parliament? Problem solved. The Scottish budget deficit would be eliminated and RBS wouldn’t even notice the loss since it is burning such enormous mountains of cash. In one month - September - it lost almost the equivalent of the Scottish budget deficit. Public money given to the RBS largely disappears into its £2.3 trillion balance sheet. A scandalous amount goes abroad to compensate other banks for RBS losses; some of it goes back to the taxpayer in “insurance” payments to the state for looking after its hundreds of billions of toxic assets. Very little of it actually goes to businesses, because, according to the RBS boss Stephen Hester on BBC radio last week, in the recession firms “aren’t asking for loans”, right now. This must come as news to all those small businesses that are going bust.
RBS insists that money put into the bank is money well spent since it will ultimately return to the taxpayer when the bank shares recover. But surely money put into public services comes back to the taxpayer much more reliably in the form of services. At least these are tangible and carry no moral hazard. Care workers don’t get bonuses and nor do teachers, nurses and dinner ladies. But arguments like this simply aren’t taken seriously. The ‘party’s over’ on public spending, we are told, and apocalypse awaits.
As the auditor general’s report on the Scottish deficit was published, I happened to be at the sharp end of the public sector crisis : a Herald - sponsored debate at a conference of personnel directors - the the people who will be handing out the p45s if and when the great public spending squeeze happens. I have to say, they didn’t seem very fearful. There were forecasts of doom, but no one seemed to think it was imminent. There was the usual talk about ‘hard choices’, getting rid of elderly care care, school meals etc.. There was curiously little enthusiasm for cutting the salaries of council chief executives, freezing public sector pay or curbing copper bottomed final salary pensions. As for efficiency savings, I was told by one expert that it costs so much to get rid of senior staff in local government that it was pointless trying. Even the idea of merging some of Scotland’s 32 local authorities to get rid of duplication, would, I was assured , add to costs because many new officials would have to be hired to supervise the mergers. They could do with some of these people in the banks.
Certainly there is fat that could be cut out of the public sector and there are privileges which are no longer sustainable at a time when private sector wages are falling and final sector pensions being axed. But there is little point in making very deep cuts in the actual provision of services, most of which are essential. What is profoundly damaging for the future is the erosion of confidence in the the value of money. All that cash thrown at the banks, along with quantitative easing and other policies, spreads a corrosive cynicism throughout the public sector. Why should they be counting the pennies and sacking lots of staff when countless billions are being handed over to financial institutions which are not only unfit for purpose, they actually obliterate the wealth they are supposed to be holding in trust?
No - the time will come for economies in the public sector, But not now. It’s just about all that’s keeping the Scottish economy going.