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Andrew Lilico

Andrew Lilico: When Ed Balls attacks infrastructure cuts he is actually attacking cuts that Labour scheduled

When debating the impact of public spending on growth, economists normally distinguish between two kinds of government spending.  "Current" spending is the money used for public sector salaries, consultants, and other such day-to-day needs.  George Osborne's original key deficit reduction target was that the structural "current" deficit would be eliminated over one Parliament.  The other kind of spending is "capital spending".  That's the money used to build new hospitals, new roads, or on other such longer-lasting investment projects.

Those keen on the idea of using government spending to boost growth typically argue that increases to capital spending (to government investment) are growth-positive, whilst increases to government current spending damage growth.  They also normally agree that raising taxes can damage growth in the short-term.

Consequently, when cutting government spending (e.g. to correct a deficit) it's thought to be better for growth if current spending is cut rather than capital spending cut and taxes raised.  In practice, though, governments tend to find it politically easier to cut capital spending that current spending, since cutting current spending might mean firing public sector workers or cutting their salaries.  So a politically weak form of deficit reduction programme, most likely to damage growth, will focus on cuts to capital spending and tax rises.

Since the Coalition government started, Labour has frequently complained about "swingeing cuts" to capital spending.  Any change to capital spending is seen as an admission by George Osborne that his deficit reduction plan has failed and it's "time for Plan B".  When Ed Balls and others say such things, it's worth bearing in mind the following table.

Table image

In this table I compare Alistair Darling's plan for cuts to government investment spending (for those interested in checking - Table 1.1 of the March 2010 Budget) with George Osborne's plans and outturns from the March 2012 Budget (Table D.6, adjusted in 2012/13 to take out the effect of the £28bn transfer of Royal Mail assets from the public sector).

We see that Osborne's government investment spending outturns and plans are virtually identical to Darling's.  Osborne did not change Labour's capital spending plans materially.

Now one could argue that the Labour Party's 2010 deficit reduction plan was deeply flawed, reliant as it was upon capital spending cuts, tax rises and over-optimism about growth.  One could even attempt to argue that Darling's plan involved too much deficit reduction.  But let's be clear: when Ed Balls says that cuts to "infrastructure spending" or "capital spending" or "government investment" have damaged growth, what he's saying is that the capital spending cuts which his government scheduled and for which he personally voted have damaged growth.  He's not attacking Osborne's "Plan A".  He's attacking Labour's Plan Darling - Plan D.


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