Spend, Rachel, spend!
After the spending review, is Labour being too frugal?
If I were Chancellor, the first thing I’d do is advocate for a massive increase in capital investment from the state.
George Osbourne and David Cameron were big believers in this idea of balancing the books: spending only what you earn from taxation.
That’s sensible if you’re an individual or a household. You don’t want to load up on credit cards or payday loans, and you want to live a financially sustainable life.
But countries aren’t households. They have something those households don’t have: the ability to print money. In fact, a government can even save itself the ink: our economy exists mostly on spreadsheets, these days.
But what about inflation?
We’re all scarred from the wave of inflation triggered by COVID, and many have blamed government spending. But, while Rishi Sunak did splurge during the pandemic, it was supply chain disruption that triggered the inflationary surge - not government spending.
That suggests that the government can pay half our restaurant bills, the wages for millions of employees and a bunch of military gear for Ukraine - and it’ll have a negligible effect on inflation so long as the supply chain remains intact.
If government spending were targeted to infrastructure projects, the inflationary effect would be even smaller. Inflation is triggered by over-demand and under-supply. But government spending can drive supply (for example, nuclear power stations increase the supply of energy and bring the cost of energy down - a counter-inflationary effect).
But what about our grandchildren?
In 1946, in a debate on the national debt, Conservative politician Lord Teviot warned: “Our great grandchildren will be still paying [Britain’s post-war debt]”.
I expect now Lord Teviot has great-great grandchildren who are alive and kicking. I don’t know them, but I don’t think they’ve complained much about our national debt. While it may be true in principle that our taxes are paying off historical debt, in practice are any of us really affected by this? It’s not like bailiffs are showing up at our door demanding Churchill’s payments.
In fact, I would wager that Teviot’s grandchildren are far more grateful to have a country that recovered from the war, rather than one still full of the scars of destruction.
Evoking “grandchildren” is a powerful rhetorical device, but the reality is that our grandchildren would be far more grateful for exceptional infrastructure than for a debt-free government.
Historical governments gave us huge infrastructure projects: the railways, bridges, tunnels, airports. I’m not convinced that we’re doing the same - and future generations will berate us more for that than they will a bit of debt that they don’t even notice.
Get spending Rachel!
On Wednesday, the spending review evoked memories of a Cameronite past: efficiency and balance being the name of the game. But Rachel Reeves should be spending to grow the economy, not cutting.
Rachel Reeves should spend on defence today, rather than risk triggering supply-chain shocks and shortages when the global situation deteriorates even further (which is now, unfortunately, inevitable). Part of the reason that COVID was so expensive was that we were unprepared. There’s no excuse to be unprepared for the global fracture we’re about to face.
Infrastructure outlay should not be included in government spending, it should be considered an investment. It’s like a consumer buying a house or putting money in a stocks and shares ISA. You lose a bit of money in the moment, but it pays back big time in the long-term.
In 2010, Nick Clegg justified not spending on a nuclear energy plant by saying it wouldn’t come on stream until 2022. In 2025, we see the silliness of that argument but our politicians are perpetually stuck in short-termism.
The government’s investment in Sizewell C is the right one: but they should double it! Do 2, or 3! Spend on better sewage, trains, roads. Prisons, courts, schools. All of this contributes to keeping people in well-paid employment, healthy and safe. Oh, and AI - we should plug billions into AI. Data centres, semiconductors, compute and research. This is the modern equivalent of building an entire railway network, with the potential to turbo-charge our productivity and make us a global leader.
It all creates jobs and stimulates the economy. I really struggle to see the argument against making massive, continuous investments in infrastructure. If I won the lottery, I would invest as much of it as possible in order to give me a lifetime of returns: the government can win the lottery every minute if it wants to. It should invest those winnings for multiple lifetimes of returns.
And it’s the inverse of Trussonomics, which prioritised using the government’s fiscal power to cut taxes. Her approach, as the market reaction showed, would not drive growth because they only benefit the richest and they discourage redistribution or market movement.
The Labour government promised change. Now is the moment to wrap up the austerity experiment and begin a new era of going for growth, not bookkeeping. We need a government that builds stuff, not balances spreadsheets.