On the impact of public spending cuts

Via this comment on a post at Liberal Conspiracy, I came across this argument from Anthony Trew against cutting quangoes that equally applies to cutting public spending in general:

With every quango abolished there will be a number of their employees losing their jobs. With every person losing their jobs there is an inevitable impact on their families. With every family affected there will be a lessening of the spending power of that family. With every family affected spending less money, local businesses will suffer. With each local businesses suffering, economies in whole areas and regions will be affected. With every local business affected every national business that supplies them will be affected too. With every business suffering, their profits will inevitably fall. With the profits of every business falling, tax receipts will fall too.

Given the above, how the hell will we not end up with a double dip recession?

The problem with this argument is that it considers only one part of the picture. One could equally validly argue against increases in public spending (and by implication against the existing public spending we have) as follows:

With every increase in public spending there will be a number of people paying more in taxes(*). With every person paying more in taxes there is an inevitable impact on their families. With every family affected there will be a lessening of the spending power of that family. With every family affected spending less money, local businesses will suffer. With each local businesses suffering, economies in whole areas and regions will be affected. With every local business affected every national business that supplies them will be affected too. With every business suffering, their profits will inevitably fall. With the profits of every business falling, tax receipts will fall too.

Given the above, how the hell will we not end up with a double dip recession?

(*) The government could fund things via borrowing, but that is really just deferred taxation.

In both arguments, the loss of spending power of those affected is claimed to undermine the country’s economic performance. In reality, assessing the impact of spending cuts on the economy will be a matter of balancing the positive impact of the reduced need for taxation  against the negative effect of making public sector workers unemployed and reducing or eliminating the services those workers were providing. If the former is greater than the latter, then the cuts will be a boost to the economy overall. If the latter is greater than the former, the cuts will undermine the economy.

Now I haven’t shown here that the government’s cuts will be either harmful or beneficial to the economy, my point is that simply looking at the reduced spending power of those made redundant via the cuts involves focusing solely on the negative impacts of the cuts.

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