Vince Cable can’t break out of George Osborne’s Trap on the economy


2:23 pm - March 7th 2013

by Duncan Weldon    


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Earlier this week I blogged on the growing calls for the Chancellor to launch a capital spending stimulus, funded by additional borrowing, at the Budget that is now less than two weeks away.

As I noted in that post, those calling for such a stimulus include NIESR, Oxford Economics and Citi group who all basically agree that a £10bn capital programme in 2013/14 and 2014/15 would add around 0.5% to growth for two years and be largely self-financing in the medium term.

Yesterday, in an essay in the New Statesman, Business Secretary Vince Cable came as close to joining the chorus as he could within the limits of collective responsibility.

Nevertheless, one obvious question is why capital investment cannot now be greatly expanded. Pessimists say that the central government is incapable of mobilising capital investment quickly. But that is absurd: only five years ago the government was managing to build infrastructure, schools and hospitals at a level £20bn higher than last year…

The more controversial question is whether the government should not switch but should borrow more, at current very low interest rates, in order to finance more capital spending: building of schools and colleges; small road and rail projects; more prudential borrowing by councils for housebuilding…

Such a strategy does not undermine the central objective of reducing the structural deficit, and may assist it by reviving growth. It may complicate the secondary objective of reducing government debt relative to GDP because it entails more state borrowing; but in a weak economy, more public investment increases the numerator and the denominator.

On Tuesday I wrote that the primary argument against a debt-funded capital soending programme now was political.

As Chancellor of the Exchequer he can surely see what the third party experts are saying – a £10bn increase in capital spending funded by borrowing would boost the economy and be largely self-financing. But as election co-ordinator he wants to keep his ‘dividing line’, to argue that he is sticking to his plans and that opposition are spend thrifts who would fritter away his ‘hard-won gains’.

After three years of arguing that deficit reduction is his central aim he has built himself a rhetorical prison in which any increase in borrowing – no matter how low interest rates are or how beneficial the impact on the economy – is wrong. The Chancellor likes to lay political traps for the opposition but this time he seems to have trapped himself.

Yesterday evening, for the second time in a month, I allowed myself to become more optimistic – maybe, just maybe the government were starting to see the light and would be prepared to launch a modest stimulus? This morning my hopes have (again) been dashed. Cameron is arguing that there can be no change in fiscal policy, whilst Nick Clegg has pointedly failed to back the Business Secretary.

We can now simply expect more of the same at the Budget.

Having ruled out a change in fiscal policy, the Chancellor is once again turning to monetary stimulus to ease the crisis. The FT today reports that plans are afoot to change the Bank of England’s remit. But as I’ve written before, whilst there is a case for looking again at the Bank’s mandate we should bear in mind the limits of monetary policy. In the final analysis I struggle to see how short term growth can be boosted without a change in fiscal policy.

In his essay Vince Cable implicitly argued that fiscal policy is too tight, monetary policy too cautious, the Government supply side agenda is misguided and banking is too unreformed. In seems that the Chancellor may be prepared to have a more adventurous monetary policy but refuses to budge on anythiong else. Trapped by his own previous rhetoric the Chancellor is unprepared to change course in a meaningful manner.

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About the author
Duncan is a regular contributor. He has worked as an economist at the Bank of England, in fund management and at the Labour Party. He is a Senior Policy Officer at the TUC’s Economic and Social Affairs Department.
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Reader comments


So Mr Cameron says the Treasury cleared the Cable speech. Clegg rubbishes and disagrees with Cable. Do you ever get the impression that behind the scenes in the government is utter chaos? They can never agree on a consistent line for anything longer than a few days, and they wonder why investment is not increasing fast enough.

No need for an increase in capital spending to be all debt-funded. Shift some government consumption spending to capital spending by closing down some useless government departments. We could start with, say, the Department for Business, Innovation and Skills. There are probably at least another 6 entire government departments who serve no useful purpose. A shovel-ready simple project that people would immediate feel the benefit would be to repair our appalling potholed roads and pavements. The A and B roads are deteriorating to developing world standards. It would probably take in the region of £20 billion to just repair our roads network, which is an indication of how much needs to be done when you are only calling for £10 billion in total capex.

More of the same to be expected…oh goody! Sticking to the ‘there is no plan B’ strategy until he runs us into the ground.

IMO this here is a fair and balanced assessment of the present situation with Britain’s economy but the emphasis is on looking to monetary policy measures to maintain what amounts to very modest growth prospects:
http://www.standard.co.uk/business/business-news/bank-of-england-qe-vote-set-to-be-tight-decision-8523798.html

In Thursday’s FT: “Osborne to hand Carney [the incoming governor of the Bank of England in July] more powers”

The politics of this are becoming very clear: Osborne has washed his hands of responsibility for the state of the economy. If growth of the economy remains subdued and living standards continue to be stressed or, worse still, the economy sinks back into the recession, it will be the fault of the Bank of England. The buck is being passed.

Btw a new book – with a distinct keynesian flavour – on the imbalances in the world economy has just come out:

Peter Temin (MIT) and David Vines (Oxford): The Leaderless Economy (Princeton UP 2013)

A serious question here.

“As I noted in that post, those calling for such a stimulus include NIESR, Oxford Economics and Citi group who all basically agree that a £10bn capital programme in 2013/14 and 2014/15 would add around 0.5% to growth for two years”

Assume, fot the purposes of my argument and any answer, that I buy the capital investment leads to GDP growth.

In these models that are being used, what’s the delay between deciding to spend the money and the money actually being spent?

For example, it usually take 18 months to three years to get planning permission. So how can spending have an effect in that two year period?

I guess the point I’m trying to make is that there just aren’t “shovel ready” projects out there. And the question I’m asking is how is this accounted for in these economic models being used?

Just to give an example of reality….OK, not UK, but German. I’ve a lease, signed last month, on a mine dump that I want to reprocess. It takes a year to get the license to reprocess a mine dump. We couldn’t start the process of gaining that license until we had the signed lease.

That’s a one year delay in something I have the finance to do, the desire to do and customers waiting for.

How is that incorporated into these models that conclude that capital spending raises output? Serious question and I’d appreciate a serious answer.

5. Charlieman

I dunno how you lot have analysed it but it says to me that Vince, passed by owing to age, wants to run the LibDems.

How is Britain’s economy doing under the ministerial supervision of Osborne and Cable?

Consider competitiveness as indicated by the balance of overseas trade?

“even though the pound has lost up to a third of its value against major currencies since the onset of the financial crisis, Britain this year will be the only developed economy in the world that will register a current account deficit that will be higher, at 3.1 percent of G.D.P., than it was in 2009.”
http://www.cnbc.com/id/100489014

What of business investment? Is business investing more in Britain with confidence that demand at home and demand will justify the decisions taken?

“UK Business Investment Drops by £400m in Fourth Quarter”
http://www.ibtimes.co.uk/articles/440021/20130227/uk-business-investment-ons-q4-economy.htm

8. Keith Reeder

“The politics of this are becoming very clear: Osborne has washed his hands of responsibility for the state of the economy”

Truer to say that he’s washed his hands of responsibility for IMPROVING the state of the economy – he’s still fully involved in its ongoing butt-fucking.

“Truer to say that he’s washed his hands of responsibility for IMPROVING the state of the economy – he’s still fully involved in its ongoing butt-fucking.”

I think the official line is that the Treasury will continue to focus on reducing the budget deficit, ensuring efficient public spending and creating incentives to work and invest. The Treasury is formally abandoning any responsibility for “contra-cyclical” policy.

The irony is that he has created austerity but government borrowing has actually increased:

“The Office for National Statistics said that once special factors such as the transfer of the Royal Mail Pension fund and QE profits were excluded, the budget deficit for the first 10 months of the 2012-13 financial year was 6.6% higher than in the same period of 2011-12.”
http://www.channel4.com/news/january-borrowing-figures-surplus-higher-than-expected

Cameron and supporters are in denial.


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