I am asked if we can spend our way out of a recession? I write against a silly political background, where the left are trying to annex Keynes again, as if he were a left wing figure whose views had been buried by Conservative monetarists and deregulators. The truth is very different.
Margaret Thatcher kept her copy of the 1944 White Paper on employment, which incorporated some of Keynes’s perceptions. She used it in one of her big party conference speeches. Conservative economists working since Keynes have usually drawn on his insights as well as the views of others. It was a Labour Prime Minister, James Callaghan, who officially incorporated monetarist thinking into UK government economic policy making, when he recognised that more public borrowing in an inflationary era would make matters worse.
Of course in one sense you can only overcome a recession by more spending. A recession is insufficient demand chasing too many goods and services , leading to job losses, falling prices and cuts in output. The issue is not whether we need more demand or not, but how you bring that about. Confidence is a precious flower, and can be easily damaged if governments take the wrong decisions.
The priority is to encourage more private sector demand, because it is private sector demand which is falling sharply. You do that by cutting interest rates substantially. I have been calling for cuts to head off recession for many months. The authorities are far too slow, persisting wrongly in thinking inflation is next year’s problem when recession is next year’s problem. Lower interest rates feed through immediately to borrowers whose rates are linked to MLR, and later will benefit others as money markets start to function better.
We need more confidence and cash in the system. That is why the Conservative leadership has backed the banking package in its entirety, to give it the best possible chance of succeeding. Until there is more confidence there will be insufficient private sector demand. The gap will be too large for an overborrowed public sector to be able to fill, even if the government took the risk of expanding public borrowing even more than they are already doing.
If the government presses ahead with borrowing £37 billion for bank capital its scope for further borrowing to undertake counter cyclical works will be even more limited. I think they should spend some time amending the package, to get as much of the new banking capital from private sources as possible. This would leave them with a little more flexibility.
As it is, we are facing a huge overrun on borrowing compared with budget. The downturn itself and other policy changes announced so far have probably boosted borrowing by £20 billion this year, on top of the £37 billion for the banks. This means a borrowing requirement forecast at £43 billion could exceed £100 billion. Government needs to keep confidence in its own powers to raise money. These figures are large. Given the delay in trying to get new larger capital projects off the shelf and into action, and given the high borrowing requirement, I do not see a lot of scope for the government on its own to spend us out of recession on this year’s budget. It has to find other ways of allowing the private sector to pick up.