When I heard the BBC tell me this morning that the CBI had called for £100 billion extra public spending in order to prevent a deeper recession I was ready to blog about the CBI’s economic illiteracy. When I read their Press Release I was interested to see the CBI said no such thing. They merely reported the obvious, that as the economy falls so public spending and borrowing will increase automatically, to pay more benefits to the unemployed against a background of declining tax revenues.
The CBI’s latest press release makes sense. It is a distinct improvement on their dangerous advocacy of the Exchange Rate Mechanism in the late 1980s, when I took a large Stock Exchange quoted company out of membership of the CBI in protest at their wrong headed stance. I remember their incomprehension that I felt so strongly about it as to cancel membership. I subsequently had to face taunts in government when I opposed our membership of the ERM that I should be supporting it as a DTI Minister faced with the strong representations of the CBI in favour.
Instead I can blog about the BBC’s sloppiness and their misunderstanding of how an economy works. Let’s try again. If you order another £100 billion of public spending on top of what is already happening, you need to increase taxes by £100 billion to pay for it. If the taxes fall directly on companies they will be worse off by at least the costs of collecting and spending the money. If the taxes fall on individuals, the companies will lose that part of their demand as people’s incomes are cut by higher taxes.
If the BBC’s idea of the CBI idea is that the £100 billion should be borrowed, then the taxpayer in the longer term will be even worse off, as the government will need to increase taxes some time to pay not just the £100 billion but also the interest on it. In the short term if the money lent to the government would otherwise have been lent to the private sector we are not better off. Indeed, borrowing from individuals and companies is a bit like increasing their taxes in its economic impact, as money they might other wise spend is taken by the government as a loan instead.
President Obama’s naïve “Keynsianism” is being well and truly
criticised in the USA. The BBC does not seem to understand why.