Treasury twins convert to contingent Keynesianism
In times of economic peril, when some of his own party are murmuring about pushing him out of the Treasury, a chancellor needs two forms of cover: a plan to change things and a compadre to share the heat.
Today, the chancellor dodged the giant shafts at the London Crossrail tunnels to launch £50bn worth of government guarantees to economy-boosting private infrastructure projects. And with him he brought Chief Secretary Danny Alexander. Danny and George… acting a little Gilbert & George. Resplendent in matching Hi-vis jackets,they did a round of joint TV interviews with economics editors including your correspondent.
There is a paradox at the heart of this Coalition Treasury. It eschews Keynesian deficit financing in principle but not so much in practice.
It is happy to borrow more, as it effectively decided at the last autumn statement, when the hole in the public finances was identified to be larger. It follows the IMF’s injunction to let the automatic stabilisers fire.
Last month it even allowed a mini-stimulus in the form of a so far unfunded half year postponement to a planned rise in fuel duty. And now it speaks the language of financing massive infrastructure projects across Britain – £250bn worth.
Now I’ve been following this for a few months. Offering straightforward government guarantees was not the Treasury plan at all. They have a habit of being called on. The original plan was to get pensions companies, and indeed sovereign wealth funds, to work on Britain’s long list of infrastructure needs.
The infrastructure plan is an impressive piece of work. Click here for my blog and film.
But clearly this is not working quickly enough. Danny Alexander blames that on the eurozone crisis, and says that using the government’s balance sheet – its credibility, its sovereign financial capital, if you like – is a sensible market-led government intervention.
The chancellor denied to me that this effectively was his Plan B.
It obviously stops short of extra planned borrowing even though it, to some degree, would be far cheaper for the government to borrow this money than the private sector. That would be a straight forward abandonment of Plan A.
An infrastructure boom?
But isn’t it fascinating how much this government wants to project the idea that its actions will propel an infrastructure boom for the public in rail, sewers, roads, broadband etc? Even the venue of today’s launch.. a massive 40m shaft – a hole in the ground – was essentially Keynesian. George Osborne tells me in our interview that it was his government that approved Crossrail. (See my full Channel 4 interview with George Osborne 18 July 2012 above or click here.)
They did reapprove it, but it was started under the previous government. But what’s amazing is that a third of its £15bn cost comes directly from central government, and a third from the private sector. And the middle third is from Transport for London; basically public sector though not entirely.
So the example the treasury twins use, the case study, the launch backdrop is pure modern Keynesianism in action, quite literally digging public-funded holes. I still anticipate that this is where the Coalition Treasury will get to, possibly in a year’s time.
Experimenting with a half-way house, a kind-of contingent Keynesianism, is probably reasonable at a time when there is some small signs of economic perkiness despite the recession. Certainly the Treasury was delighted with the widespread business support for what was seen as a “cute” and “clever” move to fire up the infrastructure engine.
But this whole narrative is difficult to square with the fact that deficit reduction has come disproportionately from slashing the government’s own infrastructure spend so far from just under £50bn in 2010 to £24bn by the end of parliament.
Labour was planning a slightly larger reduction, as the chancellor points out. But if 1) we have a quarter trillion pound deficiency in infrastructure, and 2) record low borrowing costs, at the very least one might argue that other cuts could have been prioritised over the easy cuts to investment spending.
The Treasury team are relieved by signs that inflation and unemployment are heading down again but it has been an uncomfortable year so far.
When I ask the chancellor and the chief secretary why the past six months have been so torrid for the Treasury, Mr Osborne admitted: “It’s been an incredibly difficult period to be in the Treasury”, but said that this was because of “the economic problems we inherited”, and “because of the eurozone” but that the reforms they made have put Britain in a safe position in this debt storm.
Mr Osborne, with Mr Alexander by his side, also said that today’s announcements (plus some government push on a new type of PFI) were a “reaffirmation today of the strength of the Coalition” and Mr Alexander replied saying that the government “would last until 2015”.
And when asked of his own position, Mr Osborne replied: “We are a strong team in the Treasury.. We’ve got a big job to do in getting this economy back on its feet. We’ve had some good news today.”
The message: the Coalition is united and pulling out all the stops short of a Plan B. But the proof will be in whether they fill the big hole in Britain’s economy.
Follow Faisal Islam @faisalislam
Watch Faisal Islam’s report on Channel 4 News by clicking here .