18 Jul 2012

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.

Government guarantees

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 .

13 reader comments

  1. Muralista says:

    I don’t think you can have a mix and match Keynesian policy, much as politicians try to. Keynes wanted government intervention in the form of a national investment bank not just handing over the infrastructure to the private sector.That just isn’t Keynes, though it must be a handy tag for you to use as a journalist.

  2. Philip Edwards says:


    An excellent interview. Many thanks.

    Leaving aside the usual BS (that is, everything) we got from them I am moved to note how Ozzymandias behaves when cornered, as he was on this occasion.

    Showing “determination” or “strength” (or something) he starts each sentence with those new PR interjections, “Look” or “Actually.” In a couple of body language moves he even shifted weight from foot to foot and leaned toward the interviewer a bit. He even wheedled a “Faisal” at one point.

    Meanwhile Danny Boy did his perfect impression of someone whose face has been frozen by anaesthetic, except for his lips.

    However, you can always tell when each of them is lying: their lips are moving.

    Alas poor Britain that we should be stuck with a duo of tenth rate barrow boys. Which means they’ll end up in important jobs “in the City.”

    Then again, maybe we deserve what we vote into office.

    1. TOM says:
  3. Saltaire Sam says:

    This sums up the muddle at the heart of this pathetic government.

    Oily Jeremy Hunt simpers away about the Olympic G4S meltdown that like all good governments, they had a back up plan in case something went wrong.

    George Osborne smiles the smile of the unknowing toff whose only certainty is that he won’t suffer personally thanks to daddy, and says there is only one plan and that anything that goes wrong is someone else’s fault.

    Then they both get in their chauffeur driven cars and drive off to a world where no harm comes to those in power, ignoring anyone they pass who might be going hungry because of their policies.

  4. pierregonzalez says:

    One of the advantges of not beeing part of the Eurozone is the possibility of devaluating the Pound . The Euro is now at such a low level that it is really damaging for British exports in Europe . But nothing is done . Japan lowered the value of the Yen when it was damaging their exports ; why not to do the same ?

  5. Prince Charles says:

    The new front bench mantra “because of the Eurozone” is replacing the old one of “it was the previous Labour government”.
    The truth is the global economic system is rigged.Fraud is the only way to save the system from crashing.

    1. Philip (doffing cap) says:

      Good Heavens, Sir You should encourage HM Mummy to sack this shower & demand elections in which no-one who hasn’t done a real job for less than 10 years isn’t allowed to stand as an MP

  6. Andrew Dundas says:

    What this shows is that the Osborne-Lord Snooty narrative that they sold to ALL the UK media including the Observer & Guardian in 2010 was COMPLETELY WRONG. And still is.
    One of the favourite narratives is derived from Carmen Reinhart and Kenneth Rogoff’s book: “This time is different” that tracked ‘eight centuries of financial folly’. They propose that their laborious study shows that sovereigns get into trouble when government debts exceed 90% of GDP. But they didn’t study what interest was payable on those debts. Hence their fundamental error and the Osborne-Snooty folly.
    Neither the UK nor US governments are paying the high interest rates R&R assume always follow high levels of debt. I have high levels of debt too – but pay little interest so that isn’t a problem. R&R analyses are ‘incomplete’! To say the least.
    We never where, and are not now, in any debt spiral. The European & UK recessions are government induced. That is obvious even now. If it were otherwise, interest rates would be as high as they were last time the Tories controlled Westminster. But they’re not.
    WE should restore VAT to 15%; stop most of the cuts; apologise to the unemployed. And…

  7. Sage Against The Machine says:

    Andrew – I agree with some of what you say, especially taking interest levels into consideration, but I don’t agree that the recession is due to the European and UK governments. That would imply they have some measure of control over the economy which I don’t think they do. The economy controls them. The recession/depression was caused by a collapse in the banking sector. We are too dependant on banks due to the way in which money is borrowed into existence. Central banks don’t have adequate tools to control the quantity of money (i.e. interest rates and QE) directly and hence we have had an exponentially expanding debt with an exponentially expanding money supply trying to catch it. Just look at any graph of money supply over the last 20 years for Europe, the UK or the US. They show the same story. Commercially-issued debt-based money is now 97.4% of the money supply of this country. All created through loans by private banks or other financial institutions. That can’t be healthy or sustainable. We need public issuance of interest-free money more than ever before.

    1. Andrew Dundas says:

      This comment may be published on 31st, the 100th anniversary of Milton Friedman’s birth. Perhaps his analyses could help us?
      If QE were causing faster growth in money than output, prices in UK & Eurozone would be accelerating. But they’re falling.
      Applying Milton’s analyses, both UK & Eurozone are contracting their monetary aggregates, thus deepening our recessions as Friedman’s analysis predicts. Thus tightening money explains our continued decline in activity. Friedman also argued that monetary contractions provoked falling output, job losses and prices in 1990s Japan.
      I agree with you & Governor King that central banks can’t be the main offset of our tightening monetary conditions. When households & commerce cut spending, governments should stabilise economic conditions or accept declines in output, jobs, & tax receipts, and growing sovereign debts.
      That’s why credit-rating agencies warn of downgrades of UK & Eurozone Bonds: UK, US & Euro money is too tight.
      Our UK problem is political. Having claimed UK debt was ‘too high’, Lord Snooty needs to borrow n’ spend to restore the monetary equilibrium he wrecked. Oh dear!

  8. TERRY says:


  9. Sage Against the Machine says:


    Ain’t that the truth?! QE stands at 325bn (soon to be 375bn). That’s nearly 20% of the UK money supply. The BofE could have given this money interest-free to the Treasury and they could have credited every adult’s bank account in the UK with about 6,500 quid! The inflationary effect of QE money might end up being a lot worse than that (pound for pound) because what little of it is passed on to the real economy and SMEs (about 8%) is passed on as interest-bearing debt. An exponentially expanding money supply chasing an exponentially ballooning debt is inherently inflationary (why is it that the inflation target is 2% and not zero? Answer: A zero inflation rate for our current debt-money system would collapse the money supply). We had a golden opportunity to boost the non-financial sector and create aggregate demand/pay down debts and we blew it.

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