Especially in a Recession

Private sector couldn’t survive without public spending
March 1, 2009

Many conservative politicians and business executives have denounced rather than acclaimed the government stimulus plans recently launched in the United States and Canada. They charge that, instead of reviving the sick economy, massive additional government spending will be poured down a drain of unproductive waste, making the recession worse.

Such criticism might be warranted if applied to the multi-billion-dollar bailouts of bankers, investors, and speculators. It was mainly their unbridled greed and mismanagement that plunged the global economy into such a fearsome slump in the first place. But extra government spending on our crumbling infrastructure, on schools, on housing, on job creation, and on rescuing some key manufacturing industries will undoubtedly have the desired stimulative results.

The Harper government’s package is seriously flawed, of course, as Hugh Mackenzie and Jim Stanford point out elsewhere in this issue; and a much more effective stimulus strategy is outlined in the CCPA’s alternative budget (see the front page). In both principle and practice, however, it is incontestable that the private sector relies heavily on government spending—even when the economy is not in recession.

I’ll leave it to our economists to do the detailed analysis. All I want to do here is provide some facts and figures to show how the private sector benefits enormously from the public sector’s consumption of its goods and services. The best customers of most companies are the federal and provincial governments and other public agencies, and also the country’s millions of public employees and retirees, who spend most of their wages and pensions in the private sector.

This dependence of business on public spending was outlined nearly 25 years ago in an article in The CUPE Facts, a monthly union journal of which I was the editor at the time. It was written by David Robertson, who was then a research associate with the Ontario NDP. Let me quote a few relevant paragraphs from that article:

“The total government sector on Canada chalked up expenditures of $186 billion in 1983. Such vast sums being spent by the public sector creates a hysterical myopia in corporate boardrooms...What they fail to admit, or even recognize, is that a sizeable share of their profits comes from government spending.

“Governments (that year) spent about $68 billion on private sector goods and services—everything from paper clips to space satellites.

“Governments provided about $12 billion in subsidies to companies, including tax breaks, for new factories, machinery, expansions, etc.

“Governments provided about $50 billion to individuals and families, in pensions, unemployment insurance, welfare, etc.

“All this public money does not vanish into some mysterious black hole. Instead, it finds its way almost immediately into various corporate treasuries.

“Considering that most government revenue comes from the taxes paid by individuals and families, rather than from the taxes paid by corporations, the private sector ends up as a net beneficiary of the government spending so many business leaders complain about.”

This dependence of the private sector on the consumption of its goods and services by governments and public employees has not changed in the 24 years since Robertson’s article was first published. His figures are outdated, but more recent estimates show that the public sector remains a significant source of demand for the goods and services of the private sector.

The CLC’s Andrew Jackson reports that today the spending by all levels of government (plus not-for-profit agencies mainly funded by government) accounts for 21% of all wages, and an even heftier 29% of supplementary labour income such as pensions and health benefit coverage. The public sector accounts for 12%--one in every eight dollars--of all money spent in Canada (most of it in the private sector).

The accompanying table gives a revealing breakdown. It’s only a partial list, of course, and it doesn’t account for the consumption of private goods and services by public employees, but it should suffice to substantiate the extent of private sector reliance on government (and government employee) spending. It was largely this spending that kept many corporations profitable in good times; and it could very well be what will keep many of them from going out of business as the current bad times get worse.

(Ed Finn is the CCPA’s Senior Editor.)

Public sector consumption of private sector goods and services

Industry Gov’t share
Construction & repair 23.61%
Pharmaceuticals % chemicals 13.24%
Total commodities 11.81%
Technical, professional services 10.47%
Communications services 9.12%
Printing & publishing 6.91%
Insurance, real estate services 4.4

Source: Statistics Canada, Table 381-0013, Inputs and outputs, by industry and commodity.