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From the Second World War till the early Seventies, it was generally accepted that government could control the level of activity in the economy by raising or lowering taxes and spending. More spending meant more jobs and more prosperity; less spending slowed things down. The accelerator was pressed when private industry suffered a slowdown; the foot came off the throttle when the economy grew too fast and inflation began to rise. This was the age of Keynes - the British economist who first advocated governments printing and spending money as a way of getting out of depression.
Since then, though, the pendulum has gone off the clock in the other direction. Battered by the oil price shocks of the Seventies, Prime Minister James Callaghan bluntly told his party that it was no longer possible for governments to spend their way out of recession. That was certainly his experience at the time, as inflation soared to 26 per cent, the economy ground to a halt, unemployment soared and the public finances collapsed. To get out of the vast hole in which he and the nation had dug themselves he therefore committed Britain to the balanced budgets and financial orthodoxies of the International Monetary Fund. The rake's progress was replaced by Calvinist austerity.
When a few years later the political torch passed to Margaret Thatcher and Ronald Reagan, the move was completed. Right-wing free-market economists drove Keynes's disciples into the wilderness. It was goodbye to big government. Free markets were what mattered. The duty of government was to keep out of the way. And it has been that way ever since.
Not any more, though. In fairness, Chancellor Alistair Darling is not suggesting, as Keynes did, that it would make sense to pay one set of men to dig holes and another set to fill them in, Keynes's logic being that as they spent their wages it would get the economy going again. But then thankfully we face nothing like the problems of the Thirties, when Keynes was writing. Or for that matter the Seventies, when Labour under Wilson and Callaghan came so spectacularly unstuck. This is not about printing money, it is about flashing the plastic, raising the limit on the credit card. Darling's suggestions consist for the most part of trying to bring forward spending on already-planned projects such as schools, hospitals and roads and apparently an aircraft carrier and to put the money to work now when there is likely to be slack in the economy.
It is debatable how useful this cash will be. It takes time to plan a hospital, prepare the site and start the build, and it is not something that can easily be accelerated. A few months might be clipped off a building programme by throwing money at it but no amount of money could make it possible for something like an aircraft carrier, planned for five years hence, to start next month or even next year. Nor could you accelerate spending on the Olympics site, or Crossrail, in a way that would make an immediate difference. The processes simply take too long and the scale of the challenge is too big.
We are dealing with an economy with a national income running at £1,300 billion a year, which means a one per cent recession would cause a drop in national income in one year of £13 billion. A few million spent here and there, even a few hundred million, will not really make much of a dent. The Chancellor's statement should perhaps be read more as whistling in the dark to keep our spirits up than as a blueprint for a New Deal programme of public works. It also serves as a useful fig leaf for a budget deficit which was going through the roof anyway and which the Institute of Fiscal Studies said yesterday could top £64 billion this year rather than the £42 billion Darling predicted last March.
To argue this, however, is to miss the wider point. Economies run on confidence and the financial crisis means there is precious little of that around at the moment. Even what little there is stood to be diminished even further as fears spread that the sheer scale of spending on the bank bail-out would mean there would have to be cuts in government spending elsewhere to pay for the largesse. Such cuts would inevitably mean job losses in local government, in schools, in hospitals everywhere, in fact, where government is the principal employer and also, of course, among the tens of thousands of private businesses with whom government deals every day.
Ironically this is particularly the case because most of the new jobs created in Britain under Labour have been in the public sector with people recruited on the back of Brown's spending when he was Chancellor and was as hooked on stealth Keynesianism as he was on stealth taxes. That said, any such cuts could only mean further real pain and make a difficult situation even worse.
Darling has understood this but rather than simply say there would be no cuts which is a bit of a negative message even at the best of times he has brought himself some extra wiggle room by promising to up the levels of overall spending and create an altogether more positive story. And if it works, it will be far more as a result of making people feel better and more confident, so they continue to behave and spend normally, than a consequence of a further injection of public funds into the construction or defence industry.
It is also politically shrewd. It has been widely noted that the financial crisis has left David Cameron and the Tories hopping about in the wings and hoping they would be heard by the voters as they shouted "me too". It has all been rather uncomfortable, even in these exceptional times, for a party which does not believe in state ownership but understands the need for the measures and does not seem to have any better ideas. Now, by moving the agenda deeper into spending territory, Darling and Brown could potentially embarrass the Tories even more because an attack on Labour's spending plans henceforth will be seen, not as it was six months ago as an attack on government profligacy and waste, but instead as an attack on Labour's plans to save the economy and jobs.
Darling is in fact mapping out the battleground for the next election. The game is to divert attention from the fact that the economy is in recession, for which they bear some responsibility, to a debate about who has the best answers for dealing with the problem. This has the added piquancy that if the Tories are not careful, they risk being positioned as the party which would bail out bankers but which would refuse to help ordinary people stay in work. It's not Keynesianism that is making a comeback, it's party politics.
Reader views (3)
This spending plan would just be feasible if we did not have such a huge budget deficit (even bigger if you include PFI and public sector pensions. But given the state we are in this is irresponsible. I do not think that Blair or Darling care much as they will both be out of a job (and on a public sector bomb proof, gold plated pension)come the next election.
- Jeremy E, London, 21/10/2008 17:34
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The purpose of the government taking an equity stake was to restore confidence to the banks to enable them to lend to each other and us, preventing a run on the bank like the Northern Rock. This has been successful and adopted by governments around the world.
Two thirds of GDP comes from consumer spending. By definition if people are worried about their jobs then they will reign in spending which will further undermine the economy.
There needs to be further cuts in interest rates, even reduce the lower band Council Tax, reintroduction of the 10% tax rate for low income earners and temporary suspension of vat on home energy.
I agree we dont want to go back to Black Wednesday when Norman Lamont raised interest rates from 10% to 15% in one day when David Cameron was his Special Advisor.
- Damien Vaugh, Greenwich, London., 21/10/2008 15:24
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That's very sporting of him to use his own cash. I'll even chip in a pound or two myself. Oh wait he's spending our money without asking us? Must be, because as we all know Governments don't have money they steal it from us taxpayers....
I paid my mortgage off some while ago. Now these clowns have spent SEVENTY SIX thousand pounds for each and EVERY household. It's like a new mortgage that I didn't want, won't benefit from and will spend the rest of my life paying for. Thanks Gordon. And fools think Nu Liars are great for bribing them with their own money? Just how thick are some people? Oh wait. The same fools voted these clowns in three times on the trot. Well that explains it. Vote idiot get Brown, Bliar and Mandleson.
Taxi! Airport please!
- Rusty Shackleford, UK, 21/10/2008 13:49
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