BAD borrowing figures have increased the pressure on the government to change its course, abandon austerity and crank up new public infrastructure projects. Indeed, with a cabinet reshuffle expected in the next few weeks, a number of people have been saying that David Cameron should shuffle his chancellor, George Osborne, off to the backbenches.
Neither is a sensible recovery plan. Osborne has at least committed the UK government – which of course includes a large number of Liberal Democrats who are understandably squishy about the idea of public spending cuts – to getting the public deficit under control. Even if this is turning out to be a hard job, it is the right message and it is why the UK can borrow more cheaply than the mighty United States. Dropping Osborne now would create uncertainty that would scare off investors.
As for more infrastructure spending, paying for the over-indulgent “investment” of the Brown years – the vast school and hospital building programmes – was one of the things that got us into our present mess. We were “investing” money that we did not have. We need to learn from that mistake, not repeat it.
Where would the extra money for infrastructure spending come from? The government could raise taxes, but the tax burden is already crippling both businesses and their customers. It could print money, but that policy simply undermines confidence in sterling and distorts markets so that people make a greater number of mistaken investments.
Or – the popular solution – it could just borrow the money. This is the most bizarre idea of all. Most ordinary householders would see the folly of that solution in respect of their own finances. How can economists seriously suggest these things?
And when would we benefit from all this infrastructure spending? Business people say they want things like new roads and rail links so that business costs are reduced, which might help them to grow. But infrastructure spending is a long-term business. Planning permission for Terminal 5 at Heathrow took longer than the first and second world wars put together. Even modest by-pass plans can take almost as long. By the time businesses could expect to get any benefit from that sort of thing, most would have gone bust anyway.
Yes, government spending on construction would boost employment in the construction sector, for a time. But it would destroy even more jobs elsewhere, and more permanently. The money has to come from somewhere, either from today’s taxpayers or tomorrow’s through borrowing, or by cheating savers through inflation.
People are trying to pay down debt, and we have to let that process work out. But we also need to boost growth by making it easier for people to do business. That means a radical simplification of the tax system, cutting back higher tax rates on individuals and businesses, and getting really serious about cutting bureaucracy and regulation. And to do it right now.
Eamonn Butler is director of the Adam Smith Institute.