Flashing the cash

23 October 2008

Do politicians never learn? The Government are going to attempt to spend their way out of the recession. Again.

The Chancellor, Alistair Darling, invoked Keynes as he revealed plans to spend billions to kick-start the economy.

But just as the Great Depression was caused and exacerbated by government action (distortion of the interest rate and Britain’s decision to return to the Gold Standard at a ludicrously non-market rate caused overinvestment, debt and inflation, and Roosevelt’s New Deal slowed the recovery), government action is going to exacerbate this new problem.

Keynes’ theory was that initial government spending can lead to a greater increase in the national income. Imagine the Government spends a large amount of money. The people they pay this money to might save a little of it, but spend the rest. They then pay it to other people, who save a little more and spend the rest. So the same money gets spent several times.

However, it is obvious that while government spending causes this “multiplier” effect, it also causes an anti-multiplier effect. Had the Government not taxed and spent that money, people would have spent it themselves anyway.

In fact, the inevitable inefficiency in the tax system, let alone the public sector in general, means government spending actively harms the economy. If the last 10 years have taught us anything, it’s that increases in government spending are rarely accompanied by corresponding increases in productivity. Labour increased spending on the NHS by £43 billion in five years, and then slowed the rate of spending only slightly. But a report by the Office for National Statistics in April 2008 showed that productivity had actually fallen by 10 per cent over the previous 10 years. For example, the new GP contracts encouraged many doctors, perfectly rationally, to work shorter hours.

And “priming the pump” often means big civil engineering projects, which are capital-intensive and so less productive of jobs than private-sector small businesses.

So “priming the pump” of the economy is not a sound argument for government spending.

Even ignoring the fact that Keynes’ ideas are mostly discredited, there simply isn’t any money to spend. Keynesian “pump priming” requires the Government to save in the good years and spend in the bad. But Labour has increased government debt each year by about £30 billion plus an undeclared £80 billion. Total government debt is now about £1.8 trillion, or £74,000 per household.

Personal debt is at record levels. Our national household savings ratio is negative, meaning we aren’t actually saving anything at all. Businesses are being hit by the credit crunch because they aren’t sitting on big piles of cash. Increasing taxation won’t increase government receipts; in fact, it would probably decrease them.

The only way the Government can raise the money is to take on more debt. And that’s just future taxation: “mortgaging our children’s future”.

What’s the reason for all this government debt? Simple: too much spending. Government spending has increased by 50% in real terms since 1997. If spending had only increased with inflation, we’d have been able to abolish income tax, corporation tax, and alcohol duty. That would be really helpful at the moment, both for the economy and people feeling the pinch of rising fuel and food costs. But this government is going to end the same way all Labour governments do: running out of money.

Government spending needs to be capped by law. It should only increase with inflation and population. The Government intends to abandon its Golden Rule and its limit on debt. But what we need is a new rule to limit spending.

Hugo Hadlow is Chairman of CUCA and a third year CompSci.