We have a strange situation in which the government recognises that paying off debt and cutting spending cripples growth – but only thinks that applies to consumers with credit cards, not to public sector services – overlooking of course that laid off or pay-frozen public sector staff tend to spend less (much as people paying down credit card debts do).

As such the only real solution to this problem – investing government money on productive activities like building new infrastructure – is apparently not very available to us.

There has been some return to Labour’s policies from the immediate post-crunch period. So we are seeing talk of small grants to “kick start” stalled housing projects and so on. But things have declined so much further since those policies worked that I’m not sure the proposed half billion will make much of a dent now.

Still – only 3 years and 7 months to go before the public get consulted again.

It seems to me that the government are busily moving the goalposts at the minute. No longer are we to judge the success of their policies by the extent to which they actually reduce borrowing; rather, we’re to judge their success by the extent to which they keep interest rates low.

More and more they’re talking as if their deficit reduction plan was more of a box-ticking exercise than a serious plan to bring the deficit down: the markets wanted to see that we had a plan, so we showed them one, so now we have low interest rates. If the plan doesn’t actually *work*, because the economy stagnates and unemployment soars, well, so what?

Now if you were going to talk tough on the deficit in order to benefit from low interest rates by borrowing some cheap money to invest in infrastructure, or fund a targeted tax cut, that might almost be a plan. But borrowing cheap money to spend on unemployment benefits just isn’t terribly constructive, is it?

This is what the Tories seem unable to grasp. The choice we face isn’t between borrowing more money and not borrowing more money; that extra borrowing (£46 billion at the last count) is going to happen whether we like it or not. Our real choice is between spending that borrowed money on promoting growth, or spending it on the consequences of a lack of growth (e.g. dole cheques).

You do acknowledge, I presume, that the crisis in the eurozone and continuing uncertainty in the US has some effect on depressing the prospects of growth here?

I onlt ask ‘cos you’d never guess it from all this “the government’s plan isn’t working” malarkey.

@ 2. G.O.

There is nothing more irritating than the mantra from coalition ministers that we are enjoying record-low interest rates. As has been pointed out for sometime that low interest rates are not a policy goal, they are a tool towards the policy goal of expanded output leading to increases in employment. Record-low interest rates are a symptom that the policy goal of expanded output is failing. Limited expansion in output means less profits for firms and as a consequence equities are less valuable. Therefore, investment in government debt is attractive to investors in relation to risk assets. Interest rates would be rising if output was considered to be expanding and with expansion would come employment growth. Why they keep pushing this line when it is a symptom of failure is a mystery. Maybe they just think that the public are dumb.

Centre for Economics and Business Research (CEBR) have an even more grim forecast of just 0.7 per cent growth for next year. They may just get away with borrowing on target this year. However, subsequent years borrowing targets are certainly looking unachievable. So, because the coalition did not put in place a coherent growth plan to offset fiscal consolidation we will in fact be cutting ourselves to higher borrowing. The VAT rise was completely unnecessary for the government to ht their targets if the OBR forecasts were correct. Therefore, raising VAT to fund tax cuts before the next election looks even at this stage as if it has backfired.

It really isn’t sensible to try to cut public spending when the private sector is deleveraging rapidly and our largest export market is in a death spiral. It won’t control the deficit and will result in recession. Which is where we are headed. Why can’t Osborne see this?

@2 – “But borrowing cheap money to spend on unemployment benefits just isn’t terribly constructive, is it?”

No, so they’ll come up with more ways to make losing your job a disaster to pay for the lack of jobs.

Leon at some point the left are going to have to understand as some Liberals do, that creating jobs does not in itself help anything unless they add value. Creating employment is another thing entirely otherwise Companies would prosper by borrowing more money to over staff the HR department , and when they are awash with money they often do.
The theory that throwing cash in the air and hoping some of it eventually lands somewhere useful enough to make the deferred pain worth it, is not one anyone can take seriously

But say I am wrong , how big do you want the deficit to be ?

@ Paul

Exactly who is advocating simply ‘throwing cash in the air’? The government itself doesn’t deny – indeed, *nobody* denies – that cash spent in a targeted way (e.g. invested in infrastructure; used to fund temporary tax cuts to get people spending, lent to businesses that want to expand) can promote growth.

“creating jobs does not in itself help anything unless they add value”

True enough, but don’t forget that it can cost the government nearly as much (in benefits and lost tax revenue) to keep someone on the dole as to employ them.

When you consider that someone paid £20,000 by the government puts £4,000-£5,000ish straight back into the public purse via income tax, NI and council tax, whereas someone who’s unemployed could easily (especially if they have dependent children) end up claiming £10,000-plus in jobseeker’s allowance, housing and council tax benefit, and tax credits, it’s not remotely as if the government automatically saves £20,000 a year by sacking a £20,000-a-year worker.

So the amount of value someone has to add in order for it to be worth the government’s while employing them is probably far lower than you’re thinking – *in the present economic climate*. Obviously if the economy was growing and ex-government employees were being snapped up by the private sector, this wouldn’t apply.

“how big do you want the deficit to be?”

*sigh*

Suppose Labour last year had been advocating borrowing an extra £46 billion over the next few years to keep the economy moving by building homes, giving tax breaks to small businesses etc. The Government would have said we couldn’t afford to borrow an extra £46 billion. Point being: they are now borrowing an extra £46 billion *anyway*, just to pay unemployment benefits and plug the hole in tax revenues created by a year of stagnation.

Flowerpower: I am not sure how we can be saying that it is the eurozone which is pulling the UK economy down when the eurozone economies have been outperforming the UK economy. Shouldn’t the reality actually be the other way round.

http://ablog.typepad.com/keytrendsinglobalisation/2011/10/uk_worse_than_eurozone.html