Belfast Telegraph

Tuesday 22 July 2014

DebateNI home of Northern Ireland politics

'Myth that only the private sector creates wealth in our economy is continually damaging'

'Private sector good, public sector bad’ is simply false'
'Private sector good, public sector bad’ is simply false'

One of the most damaging myths that is continually perpetuated by the conservative right is that only the private sector creates wealth. This myth has been repeated so many times that even those on the left have started to repeat it.

The myth is based on a false premise - that the Government raises taxes from the private sector and then spends them. In reality it is the other way around. The Treasury forecasts the amount of tax it will receive based on its spending.

If the Government decides to spend more in the public sector it raises more in tax. Tax comes back to the Government not just based on the amount public sector workers’ pay on their income but also based on the multiplier of all the spending of the public sector in the entire economy.

Another reason why this myth has been so successful is that people think that our wealth equates to the physical products that are produced in factories. Since 'things' are only made in the private sector, only the private sector creates wealth.

The first thing to say is up until recent times many factories and extractive industries that produced physical things used to be part of the public sector. For example, British Steel (privatised in 1950). BP (privatised in 1977) and Rolls Royce (privatised in 1987).

However wealth is not just a measure of the physical things which we produce but a measurement of the total amount produced in our economy. We create wealth not only when we make a CD player but when music is produced for the CDs and when graphics are designed for the cover.

Governments create wealth when they provide any sort of private or public service - postal services, health services, transport, education or even the devising of policy by civil servants. Wealth is also created when Government money is spent conducting research or invested in innovation. One such innovation which owes its existence to the Government is the internet. 

Lastly, it is important to understand what we are actually measuring. Wealth is traditionally measured using GDP which has 4 factors: private spending (consumption) + government spending + investment + net exports

The amount of public services provided by the Government add to wealth as it is measured.

Privatising any part of the economy does not enable it to suddenly start becoming part of the wealth creating part of our economy. The USA has worse health outcomes even though the UK spends far less on the public sector health service as a percentage of its GDP than America does on the private sector alternative.

‘Private sector good, public sector bad’ is simply false.

 

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