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 Article written by Stephanie Flanders Stephanie Flanders Former economics editor

So it's goodbye from me

After 11 years at the BBC, I'm leaving for a new role in the City.

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  • rate this
    0

    Comment number 308.

    Osborne hasn’t got a clue. All he knows is pandering to Bankers, cutting taxes for the rich and cutting benefits for the poor.

    Cameron “said the independent watchdog had made it "absolutely clear" that spending cuts and tax rises were not responsible for the weak economy.” The OBR said it had been arguing for years that this was an issue.

    Time to go you pair of muppets.

  • rate this
    0

    Comment number 307.

    That would be VC's plan A plus. Plan B is Ed Balls.

    I live to argue but I found no argument in the above. A judgement is not an argument.

    There is only one multipier and that is to reduce the tax and regulatory burden on wealth creation. VC should be doing this as the business secretary.

    We had 13 years of calling government spending "investment". No multipier in sight.

  • rate this
    -1

    Comment number 306.

    Oh, dear.

    Vince Cable doing his usual "I'm better than all of the rest" posturing, hoping against hope that his party finally comes to its senses, realises that with Clegg at the helm* it is will be annihilated in 2015 and scouts out a new leader. Huhne is gone, so who else has the necessary gravitas?


    * Sad that Nicky today tried to invite opprobrium upon the party when it is his alone.

  • rate this
    +2

    Comment number 305.

    No304 Will,
    They do not have the brains or level of understanding to take up your sensible suggestion.
    'Dave the Dummy' is now reduced to misquoting the OBR
    Even the 'Godfather',Greenspan, accepts that their basic economic medel has been a complete failure, some would say a con trick.
    The spineless duo would sooner see British people in penury rather than admit the truth.

  • rate this
    +2

    Comment number 304.

    Surely the goverment should recognise that the current rates of interest (0.5%) provide a once in a lifetime opportunity for higher public investment, so shouldnt the UK push for growth in the short run by for example investing in public investment projects..........with a long term aim of cutting the fiscal debt?

  • Comment number 303.

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

  • rate this
    0

    Comment number 302.

    There are a number of reasons why 'Pasty George' and the failed spin doctor are being increasingly seen as incompetent fools.
    Too much time spent at the thuggish Bullingdon Club, they could have spent the time learning about life in the real world.
    Too much time, nearly two decades of bowing and scraping and carrying bags for failed Tory ministers.
    'Dave the Dummy' must go.

  • rate this
    0

    Comment number 301.

    295 No, just sequester their funds.

  • rate this
    0

    Comment number 300.

    The LibDems are unsocialist in that they don't believe in equality and are part of the 'Make the lower orders, their children & grandchildren do the lousy jobs. Meanwhile we'll toff it up talking about social justice for them' conspiracy
    Frightened of the consequences of real socialism on their absurd claim to cushy lives because of their so-called abilities they reneged on socialism & left Labour

  • rate this
    0

    Comment number 299.

    Sorry Overball remember that the current Gov is having to borrow to service the previous debt. The debt wont go away until taxes exceed borrowing; if you borrow to create something that cant be sustained you end up like PIGS who created white elephants on false money = debt. Major issue is UK people living above our collective net value. False high on house prices debt is profit/asset to banks.

  • rate this
    0

    Comment number 298.

    If the Labour Party suggest more borrowing the media open up special tanks of manure they've been saving up to pour all over them
    When VC says it the media queue up to brown their noses at his convenience.

    Now you know why we HATE the Gang of 4, Woy, Shirl, Dr & Bill. It's because they walked away with Labour's respectability making Labour's socialist rhetoric unacceptable & let the Tories in.

  • rate this
    0

    Comment number 297.

    Most MPs clearly don't understand that under our current debt-based monetary system, it is impossible to increase any form of money without a proportional increase in debt. They just don't understand that no amount of cutbacks are going to cure it; only total overhaul. Our money is produced as debt and this debt cannot ever be extinguished without extinguishing an equal amount of our money supply.

  • rate this
    +2

    Comment number 296.

    David Cameroon the Prime Minister who has added more money to the Nation Debt (yes already) than any other leader in the history of this country

    Spends all his time telling us how bad the last lot were

    OBR have accused him of miss leading statements

    I am accusing him of being an inept hypocritical fool

  • rate this
    -2

    Comment number 295.

    TO post 294

    Why don't we nationalise all those payday loan companies instead of trying to shut them down. After all they seem a really good earner and help oil the wheels of the economy by getting people to spend money they haven't got.

  • rate this
    -1

    Comment number 294.

    Why in Gods name should we BORROW more?

    Take ALL the PROFITABLE finance houses (merchant banks, equity, insurance & pension funds) into public ownership.

    Cut off pay (100% marginal rate) for EVERYONE on standards of living above average.

    Borrow? BORROW? No, just take back what the rich owe us.

    VC is gutless

  • rate this
    0

    Comment number 293.

    291
    Yes officially proved to be liar we all know him to be.Trouble is he will be a living Zombie till 2015 as he knows the Torys and his lackies the lib dems will never be trusted with power again for a very long time

  • rate this
    0

    Comment number 292.

    I remember the Vince arguing at the time of the last election for the renovation of empty homes so that they could boost the social housing stock.
    This would be a quick win.
    I'm sure he still thinks it would be a good use of public money.

  • rate this
    +2

    Comment number 291.

    Now even the OBR, the body DC set up is accusing him of lying.
    The worst prime minister and worst set of ministers this country has ever had. Cameron is now a dead man walking

  • rate this
    +1

    Comment number 290.

    Tax the rich. Cap the amount greedy Landlords can charge in rent. (re-)Nationalize the Power companies. Stop throwing public money down the drain on useless back-to-work schemes. Provide real Training and free/funded Higher Education. Reduce the working week to 3 days.

  • rate this
    0

    Comment number 289.

    #276 That quote is taken from an article in 1937. What JMK was referring to was not total govt expenditure but rather holding back some capital expenditure programmes for use later. He did not advocate in that article budget surpluses and in the same article advocated spending in distressed areas - rightly distributed demand not greater aggregate demand.

 

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