Vince Cable can’t break out of Osborne’s Trap
Earlier this week I blogged on the growing calls for the Chancellor to launch a capital spending stimulus, funded by additional borrowing, at the Budget that is now less than two weeks away.
As I noted in that post, those calling for such a stimulus include NIESR, Oxford Economics and Citi group who all basically agree that a £10bn capital programme in 2013/14 and 2014/15 would add around 0.5% to growth for two years and be largely self-financing in the medium term.
Yesterday, in an essay in the New Statesman, Business Secretary Vince Cable came as close to joining the chorus as he could within the limits of collective responsibility.
Nevertheless, one obvious question is why capital investment cannot now be greatly expanded. Pessimists say that the central government is incapable of mobilising capital investment quickly. But that is absurd: only five years ago the government was managing to build infrastructure, schools and hospitals at a level £20bn higher than last year…
The more controversial question is whether the government should not switch but should borrow more, at current very low interest rates, in order to finance more capital spending: building of schools and colleges; small road and rail projects; more prudential borrowing by councils for housebuilding…
Such a strategy does not undermine the central objective of reducing the structural deficit, and may assist it by reviving growth. It may complicate the secondary objective of reducing government debt relative to GDP because it entails more state borrowing; but in a weak economy, more public investment increases the numerator and the denominator.
On Tuesday I wrote that the primary argument against a debt-funded capital soending programme now was political.
George Osborne, as if often noted, is a hyper-political Chancellor – indeed he is not only Chancellor of the Exchequer but also the Conservatives election co-ordinator. Watching his statement last Monday I couldn’t help but think that his second job is intruding into his first. As Chancellor of the Exchequer he can surely see what the third party experts are saying – a £10bn increase in capital spending funded by borrowing would boost the economy and be largely self-financing. But as election co-ordinator he wants to keep his ‘dividing line’, to argue that he is sticking to his plans and that opposition are spend thrifts who would fritter away his ‘hard-won gains’.
After three years of arguing that deficit reduction is his central aim he has built himself a rhetorical prison in which any increase in borrowing – no matter how low interest rates are or how beneficial the impact on the economy – is wrong. The Chancellor likes to lay political traps for the opposition but this time he seems to have trapped himself.
Yesterday evening, for the second time in a month, I allowed myself to become more optimistic – maybe, just maybe the government were starting to see the light and would be prepared to launch a modest stimulus? This morning my hopes have (again) been dashed. Cameron is arguing that there can be no change in fiscal policy, whilst Nick Clegg has pointedly failed to back the Business Secretary.
We can now simply expect more of the same at the Budget.
Having ruled out a change in fiscal policy, the Chancellor is once again turning to monetary stimulus to ease the crisis. The FT today reports that plans are afoot to change the Bank of England’s remit. But as I’ve written before, whilst there is a case for looking again at the Bank’s mandate we should bear in mind the limits of monetary policy. In the final analysis I struggle to see how short term growth can be boosted without a change in fiscal policy.
In his essay Vince Cable implicitly argued that fiscal policy is too tight, monetary policy too cautious, the Government supply side agenda is misguided and banking is too unreformed. In seems that the Chancellor may be prepared to have a more adventurous monetary policy but refuses to budge on anythiong else. Trapped by his own previous rhetoric the Chancellor is unprepared to change course in a meaningful manner.