- The Guardian,
- Monday October 20 2008
The Treasury confirmed yesterday it intends to fast-track spending planned for future years as Alistair Darling signalled that he will use next month's pre-budget report to relax Labour's long-standing fiscal rules to head off the worst effects of the recession.
Over the weekend the chancellor indicated that the government would seek to reflate the economy with a period of targeted spending on large infrastructure projects. Darling said yesterday that the economic thinking of legendary economist John Maynard Keynes was coming back into vogue.
"Much of what Keynes wrote still makes sense. You will see us switching our spending priorities to areas that make a difference - housing and energy are classic examples where people are feeling squeezed. What I want to avoid is getting ourselves in a position governments have done in the past, where you face an immediate problem and cut back on the things the country will need in the future ... we can allow borrowing to rise," he added.
A Treasury spokesman said: "There is not going to be any new money but we are going to have to be imaginative. Nothing in the pre-budget report has been decided but the key thing is going to be innovation - bringing forward spending."
The chairman of the Treasury select committee, John McFall, welcomed the government plan to target spending and urged greater borrowing: "Public debt in the UK is the lowest in the G7 at 43%. Italy is 110%, Japan is 180%.
"What Alistair has set out is a classic response to a downturn and now we must make sure that the spending looks after the most vulnerable in society."
Lord Jones, a former director general of the CBI and a trade minister until this month's reshuffle, welcomed the Keynesian-style plans, but warned that the money must go on projects which "facilitate productivity.
"If it's spent on just employment, in other words loads more administrators in the public sector, of course it doesn't work," he told Radio 4. "But Alistair Darling's ideas this morning of spending ourselves out of recession, in a limited, guarded way, does have legs." The peer said public spending that did not enhance productivity would push up inflation. It was a risk that ought to be taken, but he warned: "It could destabilise the economy if we don't really, really keep an eye on it."
The government is hemmed in by its two fiscal rules: the golden rule that insists revenues and spending are balanced over a typical economic cycle, and the sustainable investment rule which says the national debt must be below 40% of national income. Last week's package of measures to help the banks will push the national debt up rapidly, as the Northern Rock rescue did. The debt-to-national income ratio is likely to surge through 50% in the near future, while the weakening economy will push borrowing up sharply and bust the golden rule.
Darling forecast in the March budget that public borrowing would amount to £43bn in the 2008-09 fiscal year.
Today, though, the Ernst & Young ITEM Club thinktank forecasts the deficit will surge to £60bn this year and £92bn in 2009-10. That would breach the golden rule if the government did not fairly soon raise taxes and cut spending, something Darling is reluctant to do.
Figures out today are likely to confirm the continued deterioration in the public finances caused by the weakening economy. Rising unemployment hits income tax revenues while a collapse in house sales and falling stock market hit stamp duty and capital gains tax revenues.
Spending on benefits also tends to rise in a slowdown as people lose their jobs. Unemployment is expected to rise from around 1.7 million to above 2 million by Christmas. Figures last week showed the biggest jump in unemployment - 164,000 - since the depths of the early 1990s recession. That was up to August, before the latest chapter of the credit crisis.
Darling also signalled jobs would be created by the construction of two aircraft carriers and the replacement of the Trident nuclear deterrent, as well as projects such as the £16bn Crossrail and the 2012 Olympic Games, both in London.
Medical buildings, social housing and leisure centres might also be built more quickly to boost a construction sector hit by a collapse in the building of houses and commercial buildings.
Last week Ed Miliband, the minister in charge of the newly-created energy and climate change department, indicated he would look at ways to create jobs in green technologies such as home insulation.
Yesterday the business secretary, Peter Mandelson, denied the government's new strategy amounted to "spend, spend, spend" but said a spending increase was possible since the government had been paying off debt over the last decade.
Born in 1883, educated at Eton and a darling of the Bloomsbury group, John Maynard Keynes was one of the 20th century's most influential economists. His idea was basic: during recessions, governments should borrow to pump money into the economy. As markets slow, businesses cut investments. This leads to the dangerous cycle of fewer jobs, falling consumption and investment, which must be arrested by stimulus from public funds. Lower interest rates, making borrowing cheaper to get the economy moving again, are also integral to the plan. Governments must act in the short-term because - as he famously put it - "in the long run we are all dead".