In the last few months I have become interested in the economics of public services. Especially in relation to school funding. Like many people, I accepted that because of the 2008 financial crisis there was a need to reduce the national debt and ensure the deficit was kept to a minimum. This, I thought, would dictate how much we spent on schools.
This was all fine, until I began to realise that there was more to national debt and deficit than reducing government spending. Two things triggered this. First was the surprising election of Jeremy Corbyn to the leadership of the Labour Party in September 2015. Prominent in his campaign was forthright opposition to cuts in public spending. Corbyn argued that there were economic alternatives and this was supported by leading economists. The second trigger was a short exchange between the economist and former Greek Finance Minister, Yanis Varoufakis, on BBC Question Time at Impington Village College, Cambridge, shortly after Corbyn was elected. Here is the clip:
The audience member explains that if he goes out in Cambridge with £10 and buys three pints of beer, he is probably going be in debt. And he says if he carries on in such a way he will go bust.
He says, “Its not difficult guys. Just sit down work out what the country needs to do and work collectively together.”
Varoufakis immediately responds by saying that the country’s budget does not behave like his finances.
“Why not, why not?” Exclaims the audience member.
Varourfakis explains: “In a country total income equals total expenditure” and goes on to explain that for an individual or a household income and expenditure are independent of one another. He then explains the problem of austerity, that if a country cuts spending then it will also cut income.
Now, this I found difficult to grasp. I found it harder still to explain. However, the expenditure model for Gross Domestic Product (GDP, total income) usefully illustrates what Varoufakis is saying. Look at the relationship between income and expenditure using the following expenditure model:
GDP = (Total Consumption – what we spend on goods and services) + (Total Investment – what is invested in machinery, equipment and houses) + (Government Spending) +Net Exports
This simple model illustrates Varoufakis’s point, that the total income (GDP) has to equal total spending. That is everything that we spend or that we invest in equipment or property added to government spending and the cost of net exports adds up to our total income.
Taking this further: according to OECD data, tax revenue in the UK between 2006 and 2012 has been fairly constant at 35 per cent of GDP. So if government spending is reduced and people spend less on goods and services, then income (GDP) will be reduced. In fact Tax revenues are reduced assuming they remain approximately the same proportion of GDP. It does not necessarily achieve a reduction in the national debt, while it may reduce deficit. Indeed it looks like this is what has happened. In the first of following charts, debt has increased in spite of reduced spending. On the other hand deficit has reduced, as can be seen in the second chart.
The reason for this is that deficit, as the difference between government revenue and spending, does not reflect the full extent of economic activity. Effectively then, government reduced spending to reduce deficit but because this has reduced income it has not reduced the national debt.
I argue then, that we should be spending more on education and on schools in particular. This is because increased government spending contributes to economic activity and increased GDP. In my next post I will look more closely at this. But here I want to outline the benefits. Firstly with more school spending we could reduce teacher workload, which would likely have a positive effect on student learning. It would also have an impact on recruitment: the job would be more attractive. Finally, and in reference to my last post, it would permit innovation. The government could invest in research and development that could be undertaken by both practitioners and academics.
Finally, in spite of cuts in public spending, the government has argued it is protecting school spending. In the Autumn statement on 25 November 2015, the Chancellor of the Exchequer George Osborne said:
“I can tell the House that as a result of this spending review, not only is the schools budget protected in real terms but the total financial support for education, including childcare and our extended further and higher education loans, will increase by £10 billion. That is a real-terms increase for education, too” (Hansard).
However, a simple analysis shows that education has faced cuts. If we look at education as a proportion of GDP it gives a sense of what proportion of our national income is being spent on public education. The following chart shows that education spending has been cut considerably since 2010.
In conclusion, it seems that cutting spending on education is not going to help in reducing national debt. It might help in reducing deficit in the short-term, but deficit does not seem to be an issue. It is debt that is important. But more important still is improving the quality of education. I fear with cuts in funding and additional pressures on schools and teachers the current economic and education policy will do considerable harm to our education system. In my next post I will attempt further justification and begin to show how much increased spending on education would contribute to the nation’s finances.
Note: it is worth reading 20 February 2016 Andy Hargreave’s article in TES.
Another article from 27 March 2016 The Independent Voices ‘Handbag economics’ and the other myths that drive austerity
Update 5 April 2016
Note: since writing this I have noticed that spending in secondary schools has been maintained in terms of proportion of GDP.
However the Institute of Fiscal Studies analysis shows real terms per pupil spending cut over the life of the next parliament of 8%