The Prime Minister is back to doing what he seems to like best – talking up the prospects for the UK. An infusion of animal spirits is rarely a bad thing, and certainly isn’t now. The identification of specific projects for £5 billion of infrastructure spending is also welcome and should help to make these announcements feel more tangible. But there is still plenty of spin here too.
For a start, £5 billion is only a drop in the ocean – just 0.2 per cent of a full year’s GDP. Total public sector borrowing is already on track for around £300 billion this year. And the Chancellor had already promised more than £600 billion in new investment over five years in the March Budget. Today’s announcements have repackaged and accelerated some of this spending as a response to the Covid crisis, but the earlier commitments were the real deal.
The channelling of the spirit of Franklin D. Roosevelt is overdone as well. Unlike in the US during the prolonged slump in the 1930s, the UK economy is already bouncing back as the lockdown is lifted. Indeed, many economists question whether Roosevelt’s New Deal actually helped at all.
At best, it fixed some problems in the US economy that are not relevant today – including a sharp monetary contraction, deflation, and a financial crash. What’s more, the US still had the longest ‘Great Depression’ of any major Western economy.
The UK recovered more quickly, with fiscal restraint and supply-side policies which allowed the private sector to lead the way. West Germany’s experience after the Second World War was similar.
If the aim is to provide a further short-term boost to demand, infrastructure spending is probably too slow anyway. Investment can get the biggest bang for the buck over the longer term, provided schemes are chosen carefully. But the government’s track record here is poor.
It is even harder to find a large number of worthwhile ‘shovel-ready’ projects that can boost demand quickly. There is also a risk that the government simply takes jobs away from other priority areas, such as house building.
Of course, other fiscal tools are available. The Prime Minister rightly left any further announcements for the Chancellor’s statement early next month. However, it would make sense to delay any major new fiscal stimulus until later in the year. By then it may well be unnecessary.
There should already be enough pent-up demand to reboot the economy, without the government needing to spend and borrow even more. Policy should now focus instead on well-targeted tax cuts and on supply-side reforms – including making good on the Prime Minister’s welcome commitment to liberalise planning rules.
In turn, this should be enough to help get unemployment down again, without the government having to continue to pay large numbers of people not to work at all. Crucially, the timetable for the further easing of the nationwide lockdown is running well ahead of the timetable for scaling back the government’s job furlough scheme.
Unlike in the 1930s, or indeed 2008, the financial system is also still working well, and there has already been a huge and coordinated fiscal and monetary stimulus. The UK’s relatively flexible economy and labour markets are pretty good at creating new jobs to replace those that are lost. Getting children back to school in September would make a big difference too.
Others might prefer the government to employ more people itself, and pay them with borrowed money. But it is a mistake to think the government can promise employment for all, or indeed guarantee the sort of high-quality apprenticeship that the Prime Minister again pledged to deliver today. Infrastructure projects should also stand or fall on their own merits, not as schemes to ‘create’ jobs.
Reassuringly, the Prime Minister peppered his speech with positive comments about the strengths and importance of the private sector, wealth creation, and entrepreneurship. But there is no need for the government to do more than it has already promised in many areas – and a stronger case for doing rather less than it currently does in others.
Julian Jessop is an independent economist
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