Vince Cable's plan B: a "matter of judgement"

 
Business Secretary Vince Cable Vince Cable: "A careful and well-argued essay" for the New Statesman

Should the British government try to boost growth with higher public investment - even if it means higher borrowing?

Quite a lot of economists in the City, in economic think tanks, and in institutions such as the IMF have been pondering that question for some time.

Most of those economists, like Vince Cable, tend to think it's a matter of judgement whether it would do more good for the economy than harm.

I would say most would also agree with Mr Cable that the arguments in favour of investing and borrowing more have grown significantly over the past 18 months.

But, none of these economic ponderers are the business secretary - in a government which even today insisted that the coalition needed to hold the line on borrowing.

That makes his comments significant, as Mr Cable himself knows very well.

Even if his careful and well-argued essay for this week's New Statesman ultimately declines to come down firmly on the side of higher borrowing.

'Damage'

The politics of his remarks is something for others to consider - including, clearly, the business secretary himself. What about the economics?

Readers of this blog will be familiar with the arguments for higher public investment, which are essentially the other side of the most common criticism of the coalition's strategy from economists, that it cut public investment too dramatically in the first two years.

As Mr Cable says in his article: "Without doubt this is the least efficient form of fiscal tightening.

"It can inflict more damage on output than cuts in current spending or tax increases because the multipliers are much higher." (Remember, if the multiplier is high, that means a given amount of tightening has a larger effect on growth than other equivalent cuts, or tax rises.)

The strongest argument in favour of higher public investment, right now - voiced by the IMF and others - is that it could have a greater effect on growth than anything else the government might do on the spending side, and might even pay for itself.

The strongest arguments against have tended to be: a) that this investment can't actually be made to happen quickly enough to make a significant difference to growth in the next year or so; and b) that the higher borrowing might derail the government's deficit plans, and dent its market credibility.

Dispute

What's interesting about Mr Cable's essay is that he vigorously disputes both of these arguments against higher investment.

Start Quote

If raising public investment increases the government's assets, it's even possible that it could lower net debt - ie cut the numerator - as well as increasing GDP”

End Quote

Treasury officials have long argued that there aren't enough "shovel-ready" investment projects out there. After all, the government is struggling to push through even the investment increase it has already committed to.

This is Mr Cable's response to HMT: "Pessimists say that the central government is incapable of mobilising capital investment quickly. But that is absurd: only five years ago the government was managing to build infrastructure, schools and hospitals at a level £20bn higher than last year.

"Businesses are forward-thinking and react to a future pipe-line of activity, regardless of how 'shovel ready' it may be: we have seen that in energy investment, where the major firms need certainty over decades."

Second, on the impact of higher borrowing on the deficit strategy, and confidence, he has this to say: "Such a strategy does not undermine the central objective of reducing the structural deficit, and may assist it by reviving growth.

"It may complicate the secondary objective of reducing government debt relative to GDP because it entails more state borrowing; but in a weak economy, more public investment increases the numerator and the denominator."

Lower debt?

These are arguments which many economists would accept. It is also worth noting that the government has already broken that secondary rule of cutting government debt relative to GDP in 2015. In that sense, the damage is already done.

Also (though Mr Cable does not make this very nerdy point), it's worth remembering that the government measure - net debt - is what you get when you subtract the government's assets from its gross liabilities (debt).

If raising public investment increases the government's assets, it's even possible that it could lower net debt - ie cut the numerator - as well as increasing GDP. (I said it was nerdy).

The bigger point that Mr Cable is making here is that Mr Osborne has defined his strategy in terms of the current, structural deficit: that is, borrowing that is not due simply to the weak state of the economy and that is NOT used for public investment.

So, it would not be affected by higher public investment.

But, even if it is not included in the target measure, higher borrowing is higher borrowing, which will somehow have to be paid for.

Mr Osborne's advisers would say any increase in investment that is large enough to have a material effect on the recovery would set off alarm bells in the markets, even if the formal deficit plan had not been undermined.

A good number of City economists would agree.

That, as Mr Cable says, is indeed a matter of judgement. But in the course of 3,800 words he doesn't leave a lot of doubt as to what his private judgement would be.

 
Stephanie Flanders, Economics editor Article written by Stephanie Flanders Stephanie Flanders Former economics editor

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  • rate this
    0

    Comment number 88.

    "The government measure - net debt - is what you get when you subtract the government's assets from its gross liabilities (debt)."

    Not correct Stephanie. Public sector net debt only subtracts financial assets, not fixed ones like schools and hospitals. See here for definition: http://www.bankofengland.co.uk/statistics/Pages/iadb/notesiadb/debt.aspx

  • rate this
    +3

    Comment number 87.

    Ed Balls was right about creating growth! It seems the Tories are hell-bent on their dogmatic mission to decimate the public sector regardless of the hardship they are causing to so many peoples lives. The nasty party rules.

  • rate this
    +7

    Comment number 86.

    When govt tell us it is not really a deficit because it is spending on "investment" then run a mile.

    The day to day business of govt includes spending on things such as school building, roads and similar. That is current spending and it is all recurring spending. The spending on investment mantra is politicians trying to hide how bad the finances really are

  • rate this
    +4

    Comment number 85.

    Saint Vincent was the darling of the media before the last election as he offered allsorts of glib solutions.

    Since then, Huhne has fallen and Clegg is damaged goods. Moreover Age Discrimination is now settled law. So ambition speaks!

    Promoting Labour's agenda as his own seems a neat idea. A 2015 coalition beckons.... And Saint Vincent - whilst sartorially scruffy - is fond of neat ideas.

  • rate this
    -1

    Comment number 84.

    is it worth the gamble to borrow more money, end up with higher interest rates after being down rated further. i dont think so. we need to contain our spending

    This will be the price if labour form the next government. we will be on a fast track to a real crisis like greece

    we need to be cutting further, not borrowing more

  • rate this
    +3

    Comment number 83.

    Screw the banks let capitalism sort itself out.
    Foreign aid leave it to the private individual.
    Any money released is our last bet so let's get it right.

    Research and build our nuclear plants better than anyone else's.
    Overhaul utility sector infrastructure charging our suppliers to use it
    Sort roads schools hospitals for the next 20yrs
    Reduce our population to retain a decent standard of living

  • rate this
    +3

    Comment number 82.

    it is quite apparent to me that nobody knows what is going on, what to do to fix it or even if it can be fixed at all. Remember the 'crisis' in Greece? Well, many esteemed personages would have, as they say, 'put their houses' on a Greek exit from the Euro by the end of last year. It did not happen. The only thing you can be quite sure of is that it is all going to just carry on. Regardless.

  • rate this
    +2

    Comment number 81.

    Perhaps if Vince quantified his argument I might listen.

    How much extra does he think we should borrow to fund this?

    Where is it going to be spent and on what?

    How many jobs will it create?

    What is the ROI and when will we see it?

  • rate this
    -2

    Comment number 80.

    Whenever someone mentions growth the words infrastructure and construction crop up repeatedly.All constuction employment and jobs building infrastructure are temporary.For example once you have built a new airport or a new railway the builders are redundant.What next?Build until there is no more land to build on.After that somone will suggest reclaiming land from the sea and build on that.

  • rate this
    +2

    Comment number 79.

    Camerons stupid analogy about money trees says it all - the guy is just thick and his comments are insulting.

  • rate this
    +3

    Comment number 78.

    The real problem with long term Capital projects is that it is a future government that will reap the benefits. So the Tories are gaining from the Olympics and Crossrail, the next government will gain from any positive decisions taken now. This is why democracy doesn't really work here, politicians always have their eyes on what will do them good in the next election.

  • rate this
    +4

    Comment number 77.

    For god's sake people, wake up and smell the coffee.....



    .....whatever you think will solve the debt burden the current course WILL NOT help......



    ....it is pilling on the debt faster & faster as every year goes by and austerity & inflation continue to suck the life out of economy....


    ....we're on course to borrow £200Bn this year just to pay the extra welfare bills......

  • rate this
    0

    Comment number 76.

    70 cogsyp
    First, I don't think the debt/GDP ratio is relevant anyway, as the govt can sustain any ratio it likes because it issues the currency.

    Second - if you are interested in having a lower debt/GDP ratio through investment, the project only has to have a sufficiently large income stream (e.g. rents collected from social housing tenants), it does not need to make a profit.

  • rate this
    0

    Comment number 75.

    He is a lone voice in this lunatic cabinet, but you, me, everyone else know he is talking sense.

  • rate this
    -4

    Comment number 74.

    Cannot reconcile Cable, who to be honest has been nothing short of an oxygen bandit, this man was supposed to be sensible, well we can put that notion in the bin, he is completely lacking in conviction. Public borrowing with no accountability is a sickness that runs through our society, and obviously the BBC by the way they portray the situation. Looking for a quick fix is not the solution.

  • rate this
    -6

    Comment number 73.

    I don't believe adding to our huge debt is the solution... I am waiting for a 'catalyst' like some great new invention that will solve our problems...

  • Comment number 72.

    All this user's posts have been removed.Why?

  • rate this
    +3

    Comment number 71.

    69

    As far as I can see that is the problem. The state will not issue the guarantees to the private sector even for social housing. Once the builder has a guarantee of being paid then the job is a good'un.

    Believe you me going around currently and trying to get businesses to invest is like trying to get blood out of a stone. They are not interested in anything other than a blinding certainty.

  • rate this
    0

    Comment number 70.

    Charles Jurcich no. 65. I suggest you read SRB no. 61 (again).

  • rate this
    +2

    Comment number 69.

    66 Grocergirl
    "investment can't happen quickly enough to make a significant difference to growth *in the next year or so*"

    Finding public investment opportunities is only being made difficult because the govt is trying to make the private sector stump up most of the cash. They could simply pay for the whole project themselves instead of waiting for the private sector to show an interest.

 

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