Last night news broke that some Ministers think the government should kick start the economy with an extra £5 billion of capital spending. The BBC’s Economics Correspondent waded in giving it some credibility, revealing her lack of understanding of the public spending figures and the economic situation.
The UK economy is slowing down despite a massive £10 billion a month fiscal stimulus , all borrowed, planned for this year. It is slowing down despite the extra £10.6 billion of public spending the Chancellor put into this year’s spending plans in the March 2011 budget compared to the June 2010 budget. The UK economy is slowing down despite the boost given to capital spending in the March 2011 budget of £5 billion. Yes, the BBC’s Economics Corespondent seemed unaware that the government has already tried the £5 billion capital boost, and the economy has slowed down markedly despite it. (Red Book page 93 Public sector gross investment) She seemed unaware that the government upped the spending figures in March, with so little favourable effect.
Instead of pretending that an extra £5 billion would sudddenly do the job, those wanting this change should ask why all the boosts to spending so far have not carried us to faster growth. They should ask why just £5 billion will make such a big difference, in a £1.5 trillion economy where £5 billion can be a small error in the figures.
The truth is this economy is not short of public spending. What the economy needs is a private sector led recovery. That requires different policies towards the banks, as this site has described in recent weeks. This economy is not going anywhere fast with broken banks under a regulatory cosh. It needs some new banks with new capital raised from private markets, to lend to decent prospects and to people who have income and want to buy homes, cars and other items.
The private sector needs more confidence, more orders, less tax and a sensible regulatory framework. It does not need higher interest rates, which will come if the government relaxes its pretty loose fiscal policy any more. If all goes well the government plans to borrow a whopping £485 billion extra over five years. Given slower growth the government has already said it will borrow more than this to allow for the loss of revenue. How much more do these people want the government to borrow? Why would an extra £5 billion make such a difference? At what point do they think the UK would lose the confidence of the markets and face rocketing interest rates like Italy and Spain?
An extra £5 billion was tried in March 2011. It didn’t work. It’s time to try something else. It’s time to have some more private capital raised for some better, more competitive banks.
The IMF’s recent study forecasts the Uk borrowing 0.7% of GDP more in 2011, and 1.3% of GDP more next year as a result of slower growth. That’s another £10 billion stimulus followed by almost £20 billion. Their figures show the UK borrowing more than Greece as a percentage of GDP in 2011 and 2012 combined.