Public Values

Public sector spending is essential to our economy

Cuts to public sector have adverse effects on private sector.

Cuts to public sector affect entire community, local businesses sufferby Larry Brown

Far too many people see the economy as two separate and enclosed containers, one called the private sector and one called the public sector. In that view, if money is moved from the private sector into the public sector, it supposedly disappears forever into this enclosed container, never to be seen again, lost to the private sector forever.

It would be hard to think of a greater misconception. In reality, the private and public sectors are not separated by walls or boundaries. There is one economy and the money in circulation flows back and forth between them, each time bolstering the overall flow. In economics this is known as the multiplier effect. One famous economist described the multiplier effect as a simple recognition of the fact that our economy works because "we all take in one another’s laundry".

There simply is no viable way to cut public sector spending that doesn't have a direct negative effect on the private sector. Consider what public sector spending is. It's schools to educate workers; roads to allow businesses to ship goods; police that keep stores from being robbed; a legal system that keeps commerce more honest; purchases from private sector businesses of computers and furniture and food.

There are a thousand ways to show that public spending directly strengthens the private sector part of our economy. Public sector spending isn't money poured down a well; it is money that circulates in the system.

Some straightforward conclusions:

• If public sector spending is cut, less money will be spent on purchasing private sector goods and services. Fewer things, goods or services purchased from the private sector means the markets for the private sector will shrink, and private sector businesses will not be as profitable.

• If public sector spending is cut, it means fewer services will be provided to the private sector, and the services provided to the private sector will be less effective. Employees will not be as healthy if health care is cut; new employees not as well trained if education is cut; the roads not as well maintained, so transport is more costly. The examples could fill a book.

• That simple equation covers public sector wages, too. It's all too easy to jump on the bandwagon, call for cuts or freezes for public sector workers wages, benefits and pensions. But people need to be careful what they wish for, in case they actually get it. Of course the most immediate effect of public sector wage cuts is on public sector workers, but it is followed very quickly by the effect on private sector businesses. After all, public sector workers are not sending their wages and pension benefits to boutique banks in the Bahamas or secret Swiss accounts. They're spending that money at businesses in their communities.

The reality is that if public sector wages are cut, public sector workers will spend less in their communities. Fewer houses will be bought; less furniture sold; fewer restaurant meals purchased; fewer haircuts, clothes, cars and books will be bought. There will be a lot less discretionary spending all around. All of the private businesses that provide these sundry services in the community will pay the price.

PEI merchants know this equation well because they have lived with it. Local business in PEI was all for wage cuts for public sector workers back in the 1990s. They got what they thought they wanted — a 7.5 per cent roll-back of public sector wages. Within a couple of weeks, stores throughout the province all had signs in the windows saying: "roll back the wage rollback". That's because the effect on those businesses was dramatic and immediate. They lost a ton of business.

  "If public sector jobs are lost, private sector jobs will be lost as a direct result. Every job lost has a multiplier effect causing other job losses because that income and spending is taken out of the economy. One US study calculated that the loss of 8,708 manufacturing jobs in a particular area resulted in a total reduction in regional employment of 18,345 jobs over ten years."

A large part of public sector spending is recycled back into public revenue. Public employees pay income tax, sales tax and property tax. They also make their EI and CPP contributions. Government and public employee spending allows businesses to prosper. Businesses then pay taxes and hire employees who pay taxes. The money flows out and then back in, along the way creating economic activity, building the economy, which helps build public revenue.

Public sector spending cuts will cause more unemployment. This point has been underlined by a recent Alberta Federation of Labour study. The study, which is based on figures from the government itself, shows that a cut of $1 billion in spending would mean a loss of about 5,500 public and private sector jobs in the wider economy in that province.

If public sector jobs are lost, private sector jobs will be lost as a direct result. Every job lost has a multiplier effect causing other job losses because that income and spending is taken out of the economy. One US study calculated that the loss of 8,708 manufacturing jobs in a particular area resulted in a total reduction in regional employment of 18,345 jobs over ten years. A Scottish study found that 100 jobs lost initially created a net loss of 318 direct and indirect job losses.

NUPGE commissioned a study from Informetrica on this issue in the mid–1990s and obtained conclusions that are still valid today. The study shows clearly that jobs cut from the public sector payroll will result in jobs lost in the private sector because of the loss of that spending power in the community.

In fact, taking decent government jobs out of a community can even kill the community. Anyone from a small town where government jobs have been cut knows the truth of that.

Cutting public spending and public sector wages and pensions are being trumpeted as an easy choice to make. But sometimes the easiest things to do are the worst options to choose. Cutting public spending will weaken the economy by slowing down economic activity further. That's never a good choice. Right now it would be the worst choice to make.

Larry Brown is the national secretary-treasurer, National Union of Public and General Employees (NUPGE) is one of Canada's largest labour organizations with over 340,000 members. Its mission is to improve the lives of working families and to build a stronger Canada by ensuring our common wealth is used for the common good.

Links and sources
  NUPGE site

Posted: March 13, 2010

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