The Government’s Stimulus Z-Turn
Today the Government has announced a £50bn plan for investment and exports. The Government will issue guarantees to large infrastructure projects (taken from the National Infrastructure Plan) to get them up and running by assuming much of the risk of failure. In addition £5bn has been earmarked to provide funding for UK exports.
These are good and very much welcome steps.
A month ago Jonathan Portes argued that after the Chancellor’s mansion House speech he had implicitly accepted that he had made the wrong call on the stimulus vs immediate austerity debate and was backing away from it. As he wrote:
No doubt the Treasury will find a way of ensuring that whatever guarantees are offered have no direct, short-term impact on the measured fiscal aggregates. But from an economic point of view that is irrelevant. The economic difference between the government borrowing from the private sector to finance investment spending, and the government guaranteeing the borrowing of another entity – with the government guarantee meaning that the lender has no more or less risk of non-repayment than if the money was lent direct to government – is marginal.
So the government has now conceded the intellectual and economic argument. Let us hope that they proceed to deliver the meaningful policy change that we have been calling for, however it is labelled.
It appears that he was right – faced with further downgrades from the IMF the government has accepted that we have a demand problem and is trying to do something to increase demand.
But whilst this plan is to be welcomed it has some pretty severe limitations.
First it is unlikely that any projects will actually get underway until mid 2013, whilst the economy needs stimulating now. There is no doubt that infrastructure spending is an extremely good way to stimulate the economy – the multipliers are high (so the government gets more ‘bang from the buck’) and there are important long-term benefits. But there is also a case for immediate tax cuts which put money in people’s pockets (such as the last government’s VAT cut or President Obama’s payroll tax cut), the advantage of these are they both relieve some of the squeeze on living standards and immediately have an impact on demand. What we really need now is both – infrastructure spending and efforts to put money in people’s pockets straight away (another option would be to bring forward one year’s benefits upgrading).
The Government is taking a step in the right direction here, but lots more could be done.
Second, there is a strong argument that simply increasing long term public borrowing (where the rates are at record lows) and spending the money on infrastructure would be a much more straight forward and timely manner of increasing investment. However the Government, through it’s tight fiscal plans and overblown rhetoric has closed this door. Credit is due to whichever Treasury official found a way to circumvent the Government’s misguided fiscal framework.
The government argues that it can only launch this programme because of its’ ‘hard won credibility’ reflected by low rates. But this is nonsense. Rates aren’t low because of excessive confidence in the Government, they are low because the markets are terrified by the lack of growth.
What we have here isn’t so much a U-turn as what could be termed a Z-turn. The Government have swerved sharply but are still heading in the same direction. Today’s announcement is welcome but not enough.