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?