In the aftermath of Britain’s ejection from the ERM, Norman Lamont, then Chancellor of the Exchequer, famously said “je ne regrette rien” – an off-the-cuff remark he surely came to regret when, not long after, he was sacked by John Major.
When, eventually, George Osborne publishes his memoirs it will be interesting to find out what the current Chancellor comes to regret. With the benefit of hindsight and free from the absurd political game that forbids its players from admitting the slightest self-doubt, what will he most wish he had done differently?
Time will tell, but his biggest regret may turn out to be not making a stronger distinction between current spending and capital spending. While there is no question that the former must be reduced, cutting the latter can be a false economy.
Writing for the Fiscal Times, the US economist, Mark Thoma, provides a good explanation of why capital spending on infrastructure, while increasing the deficit in the short-term, reduces debt in the long-term:
- “When a household hits hard times due to unexpected expenses, it’s possible to delay routine maintenance on things such as the car that is needed to get to work each day. The same is true for a business. When times are tough, maintenance on the production line, the trucks needed to deliver goods, and so on can be put off. But it cannot be delayed forever, and the household or business may need to borrow money to pay for the maintenance and repairs even if debt burdens are already relatively high.
- “Keeping the car running, the fleet of trucks on the road, and the production line in operation allows the worker and firm to earn the income needed to pay back the money borrowed for the routine maintenance, and to pay off other debt as well. That wouldn’t be possible – debts are unlikely to be paid off – if the maintenance is skipped and the car or production line breaks down catastrophically and suddenly there is no job or business at all.”
Similarly, a nation can build up a backlog of repairs if it fails to undertake necessary maintenance of, and improvements to, its essential infrastructure. This ‘infrastructure debt’ may not show up on our public accounts, but it does eventually undermine confidence and growth.
As the old proverb has it, one should ‘mend the roof while the sun shines’; but, failing that, a deep economic crisis isn't a bad time to spend money on infrastructure:
- “We are in a situation where the costs of infrastructure construction are very, very low. Interest rates are near zero, a sign that the financial community has no worries about loaning us the money, so borrowing long-term has very little interest expense associated with it. In addition, high unemployment has reduced wage costs, and low demand for raw materials due to economic troubles in developed economies has reduced the price of the other inputs that are needed for infrastructure construction.”
Some economists would add that extra government spending in a recession pays for itself in a downturn by replacing lost demand, thus getting the economy growing again. However, even if one isn’t a signed-up member of the neo-Keynesian magic money brigade, the logic of upgrading infrastructure at a bargain price should be unanswerable.
George Osborne can, at the very least, console himself with this thought: It was his decision to cut infrastructure spending by less than Labour’s plans for this Parliament. So even at its worst, Government policy is still better than the alternative.