It’s not money, it’s scarce resources that matter

It really is time that people realised most government spending pays for itself

No, it doesn’t. Take the money part out of it. Look at resources, scarce economic resources.

Let’s just say there’s the one, for ease of explication. Labour.

There’re 100 units of labour available. So, we send 10 of those units off to produce health care (the NHS is near enough 10% of GDP after all).

That means that we’ve 90 units of labour to provide everytihng which isn’t health care.

Great, we’ll add another unit of labour to health care provision. We now have 11 units providing health care and 89 providing everything which isn’t health care.

We have not, by adding more labour to health care provision, been able to make it pay for itself. We are richer by the output of one unit of labour in producing health care, poorer by the loss of the output of one unit of labour producing everything else.

Talking about money and tax does not change this equation at all.

Note what it does not say – that we should, or should not, add more labour to health care provision. That’s dependent upon whether the value of the extra health care is worth more than the loss of part of everything else. Whether it’s worth it depends upon he opportunity costs, obviously, everything always does.

The example just reveals the underlying logic here.

And note what Tuber’s insistence is. If having more health care just pays for itself then there are no opportunity costs, are there? And the thing is economics is really most insistence that there always are those opportunity costs. Really, always. The cost of our doing this thing is the loss of all of the other things we couldn’t do because we did.

Then there’s this:

Of course spending £20 billion more on the NHS has a tax dimension. And of course tax revenues will rise. But that’s not because rates will have to increase or allowances will have to be reduced. That is because there will be £20 billion more economic activity in the UK economy. And if there is £20 billion more economic activity in the UK economy then the very least that could be acknowledged is that tax will be paid upon it. And given that the average tax take in the UK economy is around 35% of GDP, then that’s the minimum additional tax that will be due. So, Rawnsley could at least acknowledge that about £7bn of the 20bn cost of this spend will be settled by the tax due by those it will be spent on.

And, of course, we know that the tax yield can be higher than that. This is because of the multiplier effect. There is a simple explanation here. The essence is that the spend on the NHS is not all that will happen as a result of that spend. The £13 billion of so left in people’s pockets as a result of that spend will be spent. And that will give rise to additional tax paid. And so on. But more than that; this new demand will stimulate additional new economic activity in itself quite outside the original NHS environment. And that new demand will result in more tax paid, especially if it results in new investment.

I am not going to argue whether as a result all, more or less of the £20 billion will be recovered as tax in the end. But few doubt that at least most (and I suspect rather more) will be.

So, whether or not Rawnsley believes in magic money trees the simple fact is that most of the extra spend on the NHS is paid for out of the £20 billion spent on the NHS. In other words, the additional spend pays for itself, at the very least at least in large part. And it is unforgivable that senior political correspondents do not have even this most basic of economic knowledge.

Anyone see why that doesn’t apply to CEO pay then?

16 comments on “It’s not money, it’s scarce resources that matter

  1. Its weird, its always the extra spending that pays for itself, not the current spending. How can this be? If any increase in spending pays for itself, how do we ever have a budget deficit? After all, we were in surplus once, back when Gordon was sticking to Tory spending budgets from 1997 to 2001, so why has all the increase in spending since then resulted in deficits? Were those pounds different to the pounds of the future?

    One assumes this is another of the Left’s refusals to look at reality, like the ‘not real socialism’ one that pops up every time some previously feted socialist nirvana turns into an economic and social hellhole.

  2. Under the National Socialist German Workers Party, it appeared that increased spending on building up military capability was self-funding because it was utilising wasted resources. That was a special case.
    Maybe it will cease to be special once Murphy achieves power?

  3. Isn’t he describing the financial version of the Perpetual Motion Machine? Surprised he hasn’t gone the whole hog & suggested; if the entirety of GDP was spent on the NHS, the surplus created would make the country infinitely wealthy

  4. Imagine:

    All income is taxed at 100%. Nobody will starve because that revenue will be spent and people will earn that money and spend it. Erm….just a mo…… didn’t we say that all income is taxed at 100%?

  5. “…given that the average tax take in the UK economy is around 35% of GDP, then that’s the minimum additional tax that will be due.”

    I mean. Just read that. It’s reductio ad stupidum.

    The simplistic assumption beggars belief.

    It takes a few moments to see the flaws. Unless you’re Spud or one of his demented acolytes.

    Expanding Tim’s point above, that one unit was paying tax not working the NHS. Under spud’s plan now the unit pays tax working in the NHS. No extra tax. Extra spending.

  6. He has stated repeatedly in the past that 100% of spending comes back in tax, plus the magic multiplier.

    He doesn’t seem to have actually modelled this in any meaningful way, since he’d have seen that it can’t possibly be true.

  7. The false assumption is that the £ is a fixed, rather than variable, unit of economic measure. Or, as usual, he fails to understand the existence and the effects of inflation.

  8. If we were to import that additional unit of labour would that make a difference to Tim’s opportunity cost argument – at the UK level that is.

  9. “If we were to import that additional unit of labour would that make a difference to Tim’s opportunity cost argument – at the UK level that is.”

    To some degree, but the extra imported unit of labour needs to eat and live somewhere etc, so consumes more UK resources while working for the NHS, which have to be produced by someone. The 90 non NHS labour units now have to produce enough surplus food/houses/goods etc for 11 people working in the NHS, not 10, ie a 10% increase in production, with the same labour input.

  10. Is this why we take lots of highly trained doctors and nurses from countries poorer than us, which seems to be Progressive and compassionate and not, at first glance, lazy stupid and selfish on our part.

  11. “The essence is that the spend on the NHS is not all that will happen as a result of that spend. The £13 billion of so left in people’s pockets as a result of that spend will be spent.”
    He’s assuming that all the money is spent on salaries and nothing on equipment or consumables. Or he’s assuming that all equipment and consumables are sourced in the UK using nothing but labour.

  12. I’ve used this trick many times. It really does clarify the thinking to ignore the money and focus on what is really being used up.

  13. Btw I need to apply this to the Trump/Harley Davidson story.

    My initial impression is that the EU is going to charge Europeans to buy motorcycles, and in response HD is is going to make them build them too.

    But Trump is bemoaning the loss of jobs and EU people will no doubt be trumpeting the creation of them. It’s all backwards!

  14. Minor piece of pendantry – healthcare is not the best example because some of it is used to take sick workers and make them unsick, thus creating more labour.

    Hopefully even the UK is well beyond the sweet-spot there (we desire healthcare to do more than make sick workers unsick), but you get the point.

  15. “Heres £10000!”

    “Thanks!”

    “Now give me 40% of it”

    “See? £4000 in tax paid” Pays for itself!”

  16. Tim’s extra worker going to NHS does not take into account that the worker is moved from efficient work to something much less so.

    The NHS still produces many goods and services that the public Do Not Want. If they did, they’d buy them, but they seem to prefer smokes, beer, pizza etc.

    The NHS, your best supplier of concrete boots for over 70 years.

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