Today’s preliminary GDP figures showing a 0.5% contraction in growth has seen all the usual suspects come out of the woodwork demanding more government action to avert disaster.
At one level, given government spending is a part of the GDP calculation there is truth in the notion, that all other things remaining equal, increasing spending will increase short-run GDP.
The issue is the long-term. If a UK growth strategy were as easy as printing money, redistributing, or inflating public sector wages, we wouldn’t have had a recession in 2008 and 2009. What matters in the long-run is the supply side, the parts of the economy that make things, service people, improve productivity, competitiveness, innovate or provide infrastructure necessary for any of the rest to happen.
Real economic growth, perhaps unsurprisingly, requires a real economy.
Without that, pumping up demand through spending just creates inflation. Not to mention the damage to growth and jobs caused by the higher taxes to fund it.
Borrowing to inflate demand moves problems into the future. The more that has been borrowed the more expensive it becomes to service the debt and secure new debt. Eventually you get a sovereign debt crisis. Morally it is akin to borrowing money from your children.
Borrowing to invest, i.e. spending on projects that facilitate future growth (for example the national electricity infrastructure) is better (and the basis of the Golden Rule that Gordon Brown abandoned in office), but does not improve GDP today and requires fine judgement to avoid crowding-out, cost inflation, and waste.
For example if the return on investment and risk profile of a project is good, private companies will do it anyway. If it isn’t, there has to be quite a compelling hidden social benefit case to infer government finance might be necessary. In the case of Sheffield Forgemasters for example it’s unclear what case there was for public intervention. Building Schools for the Future was delivering little at high cost without there always being a compelling need.
The central problem in a programmes of cuts then is not the proper process of deficit then debt reduction, but how it is done. It is politically easier to cancel an anonymous or unpopular infrastructure projects like Heathrow’s third runway, than reverse a decade of pay inflation without productivity gains or ideological redistribution schemes. Unbuilt airports don’t vote.
Labour’s outbursts then are focusing on the wrong things. Largely their anti-cuts agenda has focused on easy issues of popular outrage. To be credible they need to identify cuts that hurt the supply side and can’t be delivered otherwise. To be really credible they need to be review their record and decision to build on borrowing more critically.
I strongly suspect though that all we will hear from Balls is more attacks on cuts, memory lapses, and tractor statistics.