As this subject seems to have broken out amongst spin doctors and media commentators, fuelled in part by Mr Tyrie’s comments, it is time to dust it down again.
There are five main runners:
1. Spend and borrow more in the public sector – the even larger fiscal stimulus. I dismissed this idea in previous posts. It is dangerous and unlikely to work. It is usually urged by people who do not understand that the Coalition government is spending more and borrowing huge sums. The last budget increased forecast borrowing by £34 billion up to 2014-15 compared to the July 2010 budget, but this big “boost” has led to a downward revision of growth forecasts.
2. Another bout of traditional quantitative easing. This would depress the pound more, fuelling yet more inflation. This in turn would cut consumers’ spending power further, depressing demand. Government debt would stay at high prices for a bit longer, creating and prolonging a bubble which one day has to be deflated. It is unlikely to make the favourable impact on living standards and growth its advocates hope.
3. A supply side revolution. The government could cut tax rates on success and enterprise, and reduce the costs of regulation, offering a timely stimulus to business. This would help, but seems unlikely to come from the current government, given the Lib Dem influences. Mr Osborne has expressly ruled out tax cuts for three years, whilst ruling in cash spending increases throughout the plan period.
4. A state bank for small and medium sized enterprise. Some seem to be flirting with QE in a new style. The idea would be to print money and push it out to the private sector in the form of loans from a development bank or the like which the state owned. I dislike this idea, as I fear the state would be a poor judge of good ideas and prospects, and land us with yet more bad debts.
5. Capitalise new banks created from within the state banking sector with private sector money. If three banks, say, were set up, and each had £5 billion of new private capital raised from the markets, these banks could lend multiples of the £15 billion to worthwhile prospects. This could provide a welcome and private sector funded stimulus. This is the best idea.
Recent figures from the government showed that total spending keeps rising, and revenues are below estimate. The UK borrowed another £15.9 billion in August this year, up from £14 billion in August 2010. April to August saw total additional borrowing of £51.5 billion compared to £55.3 billion the previous year for the same period. This leaves the deficit reduction programme a little behind where it was planned to be on OBR figures. It is difficult to grasp how people can present this as overall cuts, or cutting too much too quickly. The increases in total spending do of course conceal some individual programme cuts as well as many increases.
Just for the record, total current public spending rose by £31.9 bn or 5.3% in the first year of this government, and is planned to rise by a further £23.9 bn or 3.8% this year. The last budget increased planned spending for the following year by £5.1 billion compared to the July 2010 Coalition budget. This increase and the accompanying large increases in borrowing over the four year period was presented as a “neutral” budget. The government plans to borrow an additional £485 billion over the planned five years of this Parliament. This is called a tight fiscal policy.