Politicians need to take charge of the economy and borrow to see a return on investment
In my last column printed in July, I advocated a radical way of using exceptionally low borrowing rates to stimulate growth in the economy and, in particular, in major infrastructure works.
I claim no credit whatsoever that the following week the chancellor came up with a programme to fund a scheme to offer a loan guarantee to the banks for a scheme that commenced on 1 August. Unfortunately, there was no clear mechanism for ensuring that such a guarantee would result in banks lending to business.
We have now also seen the second quarter GDP results for 2012, demonstrating three consecutive quarters of negative growth. Indeed, the UK economy is now about 4.5% smaller than it was before the recession, which makes it by far the worst four-year period for the UK, outside wartime, in at least 100 years. Construction was particularly hard hit with initial results projecting a staggering 3.9% drop in the last quarter, making output nearly 10% smaller than a year ago.
The UK economy is now about 4.5% smaller than it was before the recession, which makes it by far the worst four-year period for the UK, outside wartime, in at least 100 years
This time the International Monetary Fund has joined in to provide a warning that we might be going off the rails. Even diehard government supporters have been calling for an acceleration of spending on school building and defence projects. Others pin their hopes on larger infrastructure works. Still some wrongly talk about the “largest ever announcement of investment in rail since the Victorian era”. Wrongly, because much of the announcement made by David Cameron and Nick Clegg had already been cleared as long as three years ago.
Which brings us to the other problem. Because of major projects in London and the South-east, there is an impression of activity while in other parts of the country the opposite is true. There is, in fact, 10 times the investment in infrastructure in London and the South-east than in Yorkshire and the Humber. This imbalance in our economy is structural and geographic, with economic and social consequences.
What is most disturbing is to hear not only commentators but senior politicians and even industrialists misunderstanding the nature of what is meant by the structural deficit as opposed to the issue of whether we should be borrowing even more. While there is disagreement about the speed with which the structural deficit should be rebalanced, there is no argument that the government’s outgoings in terms of day-to-day expenditure should be balanced by its income, and the accumulated deficit written down.
That is of course different to borrowing at exceptionally low rates (government borrowing at around 1.5% on the bond markets), not only for stimulation and future investment, but also to ensure a tangible return on such capital investment.
The trouble is we do not have a sane accounting system that is able to differentiate between public spending on the balance sheet and investment offering a long-term return. In the private sector that would be counted as common sense.
This is crazy; the system is in charge of politics and politicians rather than the other way around. The bond markets and the dangerous downward spiral they create, accelerated by the credit rating agencies, create a merry-go-round where their often arbitrary decisions trigger further increases in the borrowing rate for countries such as Spain and Italy, even when they are implementing austerity measures. This leads to further austerity, which in turn reduces the chance of recovering and growth. We’ve had the same situation in the UK, but self-inflicted. To avoid being forced to jump to the tune of the credit rating agencies, we’ve done it voluntarily. Reduced growth = reduced activity = greater unproductive borrowing.
If I’ve lost you, I can only apologise. We are, to put it mildly, all lost. Not in the sense of “we’re all doomed”, but because even the most revered experts are walking in a fog. Show me 12 economists and I’ll show you at least 10 different points of view. Show me those operating the computerised calculations on the bond markets and I will show you an automaton.
The greatest danger we face other than the lack of confidence itself, is the mechanistic way everyone plays their part without any recognition of the real economy, the impact on the ground, and the consequences for those who look on in bewilderment at a world outside their control.
So let us get back to simple concepts, like we need to borrow to build houses, giving us energy efficient homes as well as lower maintenance costs and lower rents or mortgage repayments for those homes. We need to rebuild and refurbish schools, which will deliver long-term gains from investing in better educational facilities. We can write down the debt over a long period of time and, as at present, if we can borrow at exceptionally low rates, those who come after us will not inherit our profligacy but our foresight and proud legacy. After all, that is what the Victorians understood all too well. Do we have to learn the lesson all over again?
David Blunkett is MP for Sheffield Brightside and Hillsborough, and a former home secretary