The fundamental point, that some people seem to be missing, on the debate over cuts in UK expenditure versus loans to Ireland, is that they are not interchangeable. A pot of money can be loaned and repaid many times, but it can only be spent once.
If the Government borrows money from the market, at a low interest rate, to lend to the Irish Government at a higher rate, it is an investment which will be paid back with interest. If the Government borrows money for its own use, it is expenditure, which can only be repaid by higher taxation or cuts to services in the future.
As far as I can tell...
If the Public Sector spends a million pounds, which has been raised through new taxes, it could employ around 30 to 40 extra people for one year. The net effect would, however, be zero new jobs, as a similar number would be lost from the private sector which had to stump up the tax.
If the Public Sector spends a million pounds, that has been borrowed, it could create around 30 to 40 jobs for a year from spending its debt. Unfortunately if the debt is repaid the following year, through the making of savings or higher taxation, 60 to 80 jobs will be lost (ie all the new jobs funded from the previous year’s one off borrowing, plus a similar number as a consequence of funds being diverted to loan repayment). So, once again, the net effect, over two years, would be zero.
So, governments can't really create jobs through expenditure. At best they can smooth out employment troughs, through judicial borrowing and expenditure on the downward part of an economic cycle, when times are hard, provided they take care to reduce borrowings at the top of the cycle. It is this last bit which both Blair and Brown’s Labour Governments apparently failed to do – the old fixing the roof cliché. Since the Country has already borrowed to the limit, that its creditors believe is sustainable, painful cuts in expenditure must now be made on the downward part of the economic cycle.
The only way to sustain an increase in overall employment is from economic growth, where the private sector is able to produce more saleable goods and services. Unfortunately, excessive taxation and government borrowing both tend to inhibit economic growth.
Kipper Williams cartoon borrowed from The Guardian, copyright acknowledged
