You can’t borrow your way out of a debt crisis. Well, yes we can.

Nick Clegg has been on the media a lot in the last few days saying, amongst other things, that the Government should not have cut capital expenditure so fast in the early days of the Coalition.  This is a welcome statement although not accompanied by an apology for getting it so disastrously wrong – in housing, the cut was 60% and it has caused immense damage.

On the Marr Show today, he said the Government was committed to finding ‘innovative’ ways of raising funds for capital investment but ruled out a return to the ‘bad old days’ of traditional Government borrowing.  But, he added, ‘if people have ideas about how we can provide further capital investment into our infrastructure, without breaking the bank, of course we are open to that.’  Red Brick is glad to help.

It seems everyone is talking about getting capital investment through ‘innovative’ methods of financing these days – although it flags up in my mind the experience of ‘funny money’ loans in the 1980s (interest rate swaps and sale and leaseback of council buildings come to mind) and the expensive disaster of the Private Finance Initiative in the last two decades.  The pressure is on because the Chancellor’s economic strategy is so obviously failing and growth is nowhere to be seen, so they are casting around desperately for new ways of financing capital that are somehow consistent with ‘Plan A’.

The best questions are often the most straightforward ones.  Recently we have asked ‘why do we stick to borrowing rules that clearly discriminate against public corporate investment?’ and ‘why do we not do more housing investment when the ‘multiplier’ effect is so strong that the Government gets its money back?’  Today’s question is ‘what is wrong with borrowing anyway?’

A blog last year by leading economist Jonathan Portes, Director of the NIESR, provides most of the answer – there is nothing much wrong with borrowing even when there is a large deficit.

Portes sets out his basic argument like this: ‘with long-term government borrowing as cheap as in living memory, with unemployed workers and plenty of spare capacity and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest. This is not just basic macroeconomics, it is common sense.

His logic has a number of steps:

  • First, the economy has shown no growth since Autumn 2010 and may not regain its 2008 position until 2014. In the UK it is now a far longer period of depressed output than the Great Depression.
  • Secondly, public sector net investment has been cut in half over the last 3 years and will be cut further over the next 2. Falling construction output has become a central factor in the lack of growth and a key reason for the double and possibly the triple dip.
  • Thirdly, the cost of borrowing is historically low and below the rate of inflation.  It costs basically nothing.
  • Fourthly, the Government could fund a £30 billion (2% of GDP) investment programme through the traditional method of issuing gilts for a cost of about £150 million a year.  Or as Portes says, it could be funded through the ill-fated pasty tax or closing a few loopholes in the tax regime.

We need to get out more and take these arguments to the public.

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One Response to You can’t borrow your way out of a debt crisis. Well, yes we can.

  1. Pingback: What is wrong with borrowing anyway? | Northampton Defend Council Housing

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