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Work and prosperity
30 November 2012

Heresy of the week: Just because Plan B is worse, it doesn’t mean that Plan A is good enough

Is George Osborne’s ‘Plan A’ working? Well, it might if the recent upturn in growth is sustained, if inflation stays (more or less) under control and if the final reckoning for the Eurozone is put off a while longer.

That’s a lot of ifs. But it’s clearly what the Conservative leadership is betting on. Unable, or perhaps just unwilling, to present a bigger vision to the British people, Cameron and Osborne are staking everything on their undoubted ownership of Plan A and what they hope will be its vindication. Certainly, they will, at the next election, implore voters to keep taking the medicine.

Unfortunately, “yes it hurt, yes it worked” didn’t work as a campaign slogan for John Major in 1997 – and he had a much shallower recession to deal with and an export-led recovery to get the country out of it. Writing for Total Politics, Ian Mulheirn, director the Social Market Foundation, reminds us that recovery won’t be so easy this time:

  • “…with perma-crisis in the eurozone and slowing growth elsewhere, foreign customers don’t look likely to be able to tow the UK economy out of the doldrums either. With little prospect of new customers at home or abroad, UK firms are wary of investing: the private sector is engaged in a standoff.”

So, do we abandon Plan A-for-austerity and opt instead for Plan B-for-Balls? Or should we go for the rightwing version of Plan B (a tax giveaway in place of a spending splurge)? No, none of those, says Mulheirn:

  • “…the chancellor needs a plan that can break the private sector out of its torpor and stimulate growth, while sticking to his deficit reduction plans. Paradoxically, the years of fiscal retrenchment ahead offer him an opportunity to do just that by altering the composition of spending and taxation, and making it much more supportive of growth. Instead of waiting to phase in cuts over the next five years, he should act now to axe measures that have little impact on output, and recycle the cash into infrastructure investment that can boost GDP directly, creating jobs and increasing the long-term potential of the economy.”

In other words, less current spending, more capital spending. This makes sense for a number of reasons. Firstly, there’s plenty of spare capacity in the construction sector, so the inflationary risk is low. Secondly, the money is more likely to stimulate growth in British industry than measures designed to ‘put more money in the pocket of the consumer’ (much of it would either be spent on imports or on repaying personal debt). Thirdly, upgrading our national infrastructure is something that needs to be done anyway – doing that work now might not reduce the national debt, but it does pay-off what one might call the country’s ‘infrastructure debt’.

But would such a move represent an endorsement of Labour’s economic policy? Hardly. After all, the decision to cut capital spending so severely was taken by the previous (Labour) government. And here’s another slap in the face for Balls:

  •  “Bringing forward £15bn of the necessary cuts and recycling the saved money into infrastructure could boost output by £10bn, or 0.7 per cent of GDP per year for three years. That’s a much bigger stimulus than we’d get from a 2.5 percentage-point VAT cut.”

Finally, the thing about capital spending is that it’s a lot less 'sticky' than stimulus by tax cut or current spending. Temporary tax-cuts are politically painful to reverse; take on more public sector workers and they’ll want to stay on the payroll; but if the money goes to specific, one-off projects, there’s no permanent draw on the public purse. Once the work is done, so is the spending. A boost to infrastructure investment, paid for by cuts to less productive allocations, is not only a better use of funds in the short-term, it also phases itself out over the longer-term, leaving behind a leaner set of public accounts.

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