Does public money stimulate the economy?

Britain has a long history of public sector investment in regions that have poor local economies. The North East is a good example, Labour ploughed huge amounts of money into the North East until 22% of the workers worked in the Public Sector. The Tories cut spending after 2010. If public sector spending increases employment in the private sector by stimulating the economy we should see a disaster in the North East. Both public and private sector employment should fall. What actually happened?

Employment in the North East of England ONS Data

The graph above shows that cutting the public sector was accompanied by a rise in private sector employment. The loss of 40,000 jobs in the public sector was accompanied by a growth of 55,000 private sector jobs. Has cutting the public sector stimulated the economy of the North East?

We can be certain of one thing, if private sector growth depends on public sector spending then cutting the public sector should have reduced the private sector. This did not happen so the theory that public sector spending stimulates the economy is not tenable.

Public spending and GDP

Sydenham's Law of public expenditure and economic growth

Is Labour right?

Does public money stimulate the economy?

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