Britain is broke. This is the message that Rachel Reeves has just delivered to the nation as she announced forthcoming cuts to public spending and investment. Reeves claims that the Tories left the country in a much greater fiscal mess than the Labour Party could have realized while they were in opposition — and it’s now up to her to fix it.

Her claim is reminiscent of that made by the Tories in 2010. David Cameron and George Osborne justified their austerity agenda based on the argument that Labour’s reckless spending had damaged the nation’s economy and that tough choices would have to be made to get things back on track. Pat McFadden echoed Cameron’s language today, when he said that the chancellor was going to have to make some “very difficult spending decisions.”

A swathe of proposed infrastructure projects are set to be axed — including plans to build forty new hospitals laid out by Boris Johnson and plans to sell off yet more publicly owned property.

Reeves has also chanced upon some more positive revenue-generating measures. She plans to curb nonessential spending on private consultants, who have spent decades pushing the marketization of the public sector — an agenda that has reduced efficiency and accountability while increasing costs. The road tunnel bypassing Stone Henge is also set to be dropped, which, as Siân Berry has already pointed out, is the right decision made for all the wrong reasons.

These measures will, however, only get Reeves so far. To paraphrase Margaret Thatcher, the problem with neoliberalism is that you eventually run out of public assets to sell.

More cuts will be coming down the road. And we are certainly not likely to see much-needed increases in spending on areas like health, social care, and decarbonization. After more than a decade of Tory austerity, everyone knows that when a government says it has to make “tough choices,” it intends to be much tougher on working people than on the wealthy.

None of this will, of course, achieve Reeves’s alleged aim of improving the public finances. As hundreds of economists — not to mention trade unionists, environmentalists, and historians — warned in 2010, austerity always and everywhere fails on its own terms.

The idea behind austerity is that day-to-day public spending cannot exceed the amount collected in taxes over a long period of time. The issue is not that the government might “run out of money” — everyone knows that sovereign central banks can create money to finance a government’s spending needs.

The issue is that excessive public spending can fuel inflation, and relatedly, expectations of excessive public spending can reduce investors’ demand for government debt, driving up borrowing costs. Over the long term, this cycle of rising debt, inflation, and interest rates can create the kinds of sovereign debt crises often seen in poor countries in the past.

These are real economic issues — no government can, as some argue, simply create money ad infinitum. At a certain point, excessive and wasteful public spending will start to drive up inflation — and investors’ demand for government debt is likely to have fallen even before that point.

But similar economic problems can also be caused by insufficient public spending.

The reason higher public spending can cause inflation is that it can increase demand at a much faster rate than the supply of resources in an economy permits. If a government decides to employ millions of workers to build bridges to nowhere, then wages will increase without a commensurate rise in productivity. Over the long run, inflation will increase, and investors will start to question the nation’s solvency.

But the same problem can be caused by a long-term dearth of productive public sector investment. If a government spends decades cutting spending on public services, allowing infrastructure to degenerate without being replaced, and cutting spending on research and development, then the supply of productive resources in the economy dwindles. There are fewer productive, healthy, well-educated workers, fewer roads, bridges and ports to transport people and goods to where they are needed, and fewer new technologies for businesses to exploit.

The end result is that economic growth stalls and, in this brittle economic context, an external shock — like a pandemic or a war or an environmental catastrophe — can send inflation soaring. Investors then realize that a country is experiencing a long-term economic malaise due to a persistent dearth of investment and low productivity, making any investments in that country less desirable.

The worst possible scenario is some combination of the two — cuts to productive investment alongside increasingly wasteful public spending decisions that do not increase long-term productivity. This scenario is, as you might have guessed, not some far-off possibility. It describes our current economic reality. Successive governments have dished out billions to the wealthy and powerful while allowing the resources everyone else needs to survive to collapse.

An Alternative Economy

For many years now, we have been forced to choose between excessive and wasteful public spending on the one hand and austerity on the other hand. But there is an alternative.

Rather than wasting money on private sector consultants, unnecessary and polluting infrastructure projects, or just outright corruption, the government could prioritize investments that would actually expand the supply of available resources over the long run. What would such an approach look like?

It would mean fewer massive, glamorous infrastructure projects that made use of expensive private sector financing and advice, and many more smaller, more sustainable investments. Investments like improving existing public transport capacity in areas currently underserved by our woeful privatized bus and rail services; or expanding renewable energy across the country; or funding desperately needed research into the climate crisis, and the development of new technologies to tackle it.

Neoliberals point out that the problem with public investment is that the government often makes mistakes when it attempts to allocate resources. While the intention might be to boost economic capacity through sensible, sustainable investment, you end up with white elephants that make politicians look good.

This is an argument with which I sympathize. Politicians use their power to promote their own interests, which often leads to wasteful public spending decisions. But the solution to this problem is not to cut public spending and investment. The solution is to democratize it.

Workers, communities, and citizens know precisely where public funding is lacking, and have near-endless creative ideas as to how this money could be used. Allowing public sector workers and service users a say in how education and health spending was allocated would promote efficiency and reduce waste. Allowing local communities to come together and decide how to spend money in their local areas would improve outcomes as well as strengthen democracy. In fact, it already has. Just look at places like Porto Alegre in Brazil, or Reykjavik in Iceland, where participatory budgeting has been hailed as a huge success.

Big government is not, as some on the Left have often argued, the solution to all society’s problems. But neither, as some on the Right have often argued, is small government. The only way out of the economic mess in which the UK currently finds itself in is to hand power over the economy back to the people who make up that economy. The result would be the precise opposite scenario to that which has prevailed over the last forty years: less wasteful spending that benefits the rich and more productive spending that benefits everyone.

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