IMF backs ‘delusional’ infrastructure spending

In a debate on BBC’s Newsnight last week, Matthew Hancock MP, former chief of staff to George Osborne, accused me of being “delusional” when I called for a new major programme of infrastructure spending on projects with a positive social and economic return. Today’s IMF Concluding Statement from their latest consultation mission calls for

 “fiscal space for further (sic) growth-enhancing measures…[which] could be used to fund higher infrastructural spending, which has a high multiplier and raises potential output.” (my emphasis)

 Heaven knows, I am not the IMF’s greatest fan – but given their track record of support for the UK government’s austerity policies till now, today’s volte face is particularly remarkable – and yes, they recognize the potential of the multiplier! 

They pay formal obeisance to the principle of self-financed ‘fiscal space’ for the new capital spending, but their suggested means to do so belie this, since they say it could be created by

 “property tax reform, restraint of public employee compensation growth, and better targeting of transfers to those in need.”

 Leaving aside the complexities of property tax reform in the short term, we are left to wonder what gains can be made from restraining public sector “compensation growth”, when the Office for National Statistics show that public sector incomes are already virtually static. For the first 3 months of 2012, “the growth rate for the public sector, excluding financial services, was unchanged at 0.6 per cent.”

No, the true message is that the UK economy desperately needs government-led capital spending on beneficial projects.

The UK economy is still running (well, staggering) at 4% below its 2008 level (in terms of GDP).  This means a continuing post-crash “crater” in economic activity of £60 billion per year, so far totalling some £250 billion … even if there had been no increase in GDP from 2008 on.  That is why we in PRIME have argued for an investment programme of this amount (£60 bn), which will generate the incomes and wages, profits and tax revenues (from both private and public sectors) with which to pay for the investment.

 Jonathan Portes, of the NIESR, in proposing a similarly-focused programme of £30 billion (2% of GDP), has shown http://notthetreasuryview.blogspot.co.uk/ how the real annual cost of this programme would be only some £150 to £200 million.  We propose a more ambitious programme because of the huge scale and chronic nature of the problem – but he has demonstrated clearly that affordability is not the problem.

No, it is in truth only a failed ideology that has led to the continuing refusal of government to invest in Britain’s future.

So Matthew, insults are not the best way of winning policy debates… but ‘delusional’ does seem a good way to describe  the government’s attachment to a failing, destructive, activity-cutting austerity policy.