The public discontent with austerity and neoliberal economic policies are offering an increasing space for progressive economic policy alternatives. What should alternative policies target?
As opposed to what mainstream budget hawks suggest, public budget balance or public debt limits cannot be the aim of economic policy; they are outcomes of economic policy. The aim of policy should be to improve the wellbeing of people, and economic policies to achieve this goal need to target multiple goals of creating decent jobs with decent pay and decent working conditions for women and men, equality, and ecological and social sustainability. The success of economic policies could be assessed against a multitude of measurable targets such as hours of paid employment of men and women with decent income, job security, free time for voluntary activities, low inequality, gender parity, social security, equal universal access to decent public services such as health and social care, education, child care, housing, public transport, and clean air.
This requires well planned public investment in both green physical infrastructure and purple social infrastructure, particularly because of the public good character of many of these services. While green physical infrastructure in renewable energy, public transport, social housing as well as public spending in health and education are often embraced by most progressive economists, there is less awareness that public spending in health and social care, education and child care should be considered as investment in social infrastructure, as recommended by the Women’s Budget Group. Day to day spending in a wider range of health and social care sectors, for example, the wages of teachers, nurses or social care workers, are considered as current spending, thus not as investment, in our national accounts; however public spending in these social sectors have long term benefits to the society as a whole, with substantial productivity impact in all other sectors of the economy by increasing the skills, health and innovative capacity of people.
Crucially, public spending in social sectors improves gender equality, and reverses one of the most persistent dimensions of inequality in our societies, by delivering crucial services which are otherwise provided by the unpaid, invisible domestic labour of women. Public supply of these services helps women to participate in social and economic life more equally, if they wish to do so. This in turn further increases productivity, by unleashing the hidden potential of women. Moreover, in the current gendered occupationally segregated labour markets, these sectors employ predominantly women, and more social public spending leads closing the gender gap in employment. This is why they are labelled as purple public investment by feminists.
What does this imply for fiscal policy, and the setting of budget deficit or public debt targets? Fiscal policy should be focussed on the needs of the society, rather than aiming at a particular target for the budget deficit. Public spending can be financed by three methods, borrowing, monetary policy and taxation, all of which should be used.
The household analogy that the public sector should balance its budget just like any household is also wrong, for four reasons: First, the government is a unique economic actor, because it has its own bank – the Bank of England. It should use monetary policy, ie central bank buying government bonds, as well as borrowing in the financial markets and taxation to provide finance for socially desirable public investment. Second, the government can and should look beyond the individual objectives and aim for the long-term, collective wellbeing of the society. Third, households borrow too, eg for investing in education and housing. Fourth, if the government, cuts its spending to prioritise balancing its budget, this will lead to debt accumulation by the private sector, as in the case of Britain by households, with detrimental effects on women, young people and other low income groups.
The mainstream approach of limiting the governments’ fiscal space based on a mistaken household analogy has narrowed down the ideological space of progressive actors, such as the Labour party. Labour adopted the idea of a fiscal credibility rule in an attempt to broaden its area of manoeuvre, whereby spending on public investment can be funded by borrowing, while day to day spending is to be financed by tax revenues. Even under this limited fiscal space, the idea of defining public spending in universal health and social care, education and child care as investment in valuable social infrastructure would extend the scope for fiscal policy, so that it could be financed by borrowing as well as by raising tax revenues, if need be.
Mainstream policies consider even public spending financed by increased taxation of income, wealth and corporate profits as undesirable, based on the myth that it would lead to low private investment and productivity in the long term. Our research at the University of Greenwich shows that this assessment is rather static as it totally ignores the positive impact of these policies on macroeconomic demand, and in turn on productivity and private investment.
On the labour market front, stagnant wages caused by decades of attacks to trade unions, zero hours contracts, dodgy self-employment practices, and public sector cuts and pay freeze, has led to high household debt and the shaky debt-led, consumption-driven growth model in Britain.
A healthy growth in wages could reverse this economic fragility and improve domestic demand, which would also stimulate private investment according to our research. This requires labour market policies targeting the bottom, middle, and top of the wage distribution to decrease inequalities: a minimum wage at the level of a genuine living wage to tackle low pay, banning zero hours contracts and dodgy self-employment practices and strong enforcement of gender equality at the workplaces, improving trade union legislation and collective bargaining coverage, enforcing a pay ratio in the public sector and companies bidding for government contracts and a high top marginal income tax rate to tame the excesses at the top.
If we take care of full employment, equality, decent jobs for women and men and ecological sustainability, the budget takes care of itself.