Of the two main manifestos published last week, the Labour one seemed the more popular. Many voters are susceptible to being bribed with other people’s money, after all.
Labour claimed their plans to spend an additional £49bn were fully costed. At one level, this is true. A set of tax changes and estimates of the additional revenue they will bring is presented. These numbers do add up to the same sum as the extra spending.
It would be pure nit picking to ask where the money is to come from to pay for the nationalisation of the rail, water and mail industries. Labour says the shareholders would receive government bonds in exchange for their equity. This extra borrowing would foot the bill.
Perhaps it would be even more trivial and tendentious to draw attention to the proposed National Transformation Plan, which will spend an extra £250bn over 10 years on infrastructure. This, too, would be financed by additional government borrowing.
After all, Labour says: “We will take advantage of near-record low interest rates”. Indeed, longer term UK government bonds are currently trading at a yield of around 1 to 1.5 per cent.
But this is the essence of the problem. In economics-speak, the bond yield may not be invariant to the size of the deficit. In English, if borrowing rises sharply, interest rates might also go up.
Keynes is often regarded as the intellectual inspiration of those who want to see government borrowing increased. He himself was far more cautious. True, in his magnum opus the General Theory, he did advocate higher government spending to try and solve the depression of the 1930s. But he was very careful to point out that the potential benefits of a bigger deficit could be cancelled out if, as a result, interest rates rose sharply.
This is not a mere theoretical abstraction. In the Mediterranean economies in recent years, interest rates have regularly risen to 6 or 7 per cent, and sometimes higher still, in one of the many crises in confidence in government prudence which have taken place. The idea that Labour could borrow hundreds of billions of pounds with no consequence for interest rates is stretching credibility to breaking point.
More generally, the whole of Labour’s manifesto is costed on the naive assumption that tax and spending changes would not lead to any changes in how individuals and companies behave. An additional £23bn is planned from the corporate sector, for example.
It is possible that the tax will be passed onto consumers and this amount will be raised. But it may well be that companies will be deterred from operating in the UK at all, and corporation tax receipts will fall rather than rise.
Ex-President Hollande in France raised the top tax rate to 75 per cent. As a result, large numbers of highly skilled young French people moved to London.
The Left is very good at drawing up well intentioned detailed plans. But they usually fail because people change their behaviour in response to them.