Wisdom on spending is essential

Mar 30 2009 By Kevin Rowan The Journal

THE CBI-Tory focus on a potential difference between the Prime Minister and the Governor of the Bank of England is sadly concerned with politics rather than a serious economic argument about further fiscal stimuli.

One of the main objections to increasing Government debt further is that it will burden future generations with higher taxes. Whatever this argument’s political resonance, it can be rejected on economic grounds.

Government debt and spending always rise during a recession as a result of higher social security bills and declining tax revenues.

Conservatives presided over significant rises in debt despite their ‘small state’ credentials.

Failure to act now will, in fact, only raise unemployment further and prolong the recession. This will guarantee public spending stays high and for longer, through benefits and associated costs.

The only intervention that will genuinely reduce the potential future tax burden is to stimulate a recovery buoyant enough to generate the tax revenue to pay off the debt. Those politicians who claim they can significantly reduce public debt by other means are simply wrong.

A more serious objection to raising public debt further is that it will sooner or later scare the markets into refusing to lend any further money to the UK state.

In the worst case scenario, if there is a real fear about the solvency of the UK Government, then there could be panic selling of sterling. Any or all of these eventualities would make the UK economic situation much worse, but there is no consensus that this would happen.

One might also add that reining in spending now may actually cause deterioration in market confidence.

Last week saw a hugely important manufacturing contract, SeaDragon, shipped out to Singapore, despite the Government having a majority share of the bank funding the work, Lloyds. Manufacturing jobs are being lost while the banking sector has enjoyed billions of taxpayer bailouts to keep them afloat, suggesting a poor return on that investment. If we are to see greater public spending to support the economy, it should surely be money spent more wisely.

Kevin Rowan is regional secretary Northern TUC