Spend to save

Rachel Reeves outlines how next month's budget can put Britain on the road to economic recovery

President Obama had hoped to sign in to law a fiscal stimulus package in his first few days in office. But American politics quickly returned to business as usual, with Republican senators watering down Obama’s proposals. Yet, even with amendments, the size of the US package is over 5 per cent of GDP, with two-thirds spent on additional direct government spending. America’s measures are just one piece in a global jigsaw. The Chinese government has committed a phenomenal 15 per cent of GDP to fiscal stimulus. Even Germany, which mocked Britain’s ‘crass Keynesianism’, is planning to spend 3.1 per cent. The international consensus has converged on the need for action. Quite simply, the costs of doing nothing are too high. Take the case of Japan, which has a debt/GDP ratio of around 90 per cent, more than twice the size of the UK’s. The reason is straightforward – Japan has been in and out of recession for 19 years. The costs of a prolonged slump are greater than a temporary, targeted and substantial fiscal stimulus.

At 1.3 per cent of GDP, the UK stimulus to date has been well targeted – as have efforts to get banks lending again. April’s budget is Alistair Darling’s opportunity to commit more to fighting this global recession – which is clearly going to be longer and deeper than envisaged. Alternative sources of growth are needed and government investment, including to build a more balanced economy, will ensure the economy is well placed to benefit from the upturn, when it comes.

However, it is worth noting the limits to what the UK government can do. While the dollar is the world’s reserve currency (around 60 per cent of the world’s money is held in dollars), we have to be mindful of the confidence of international investors to avoid provoking a decline in the value of sterling and creating difficulties in funding our additional spending. We must spend the money wisely on things that will definitely deliver jobs and growth, and we must be clear about how we will return the budget to balance.

The UK budget must focus on three things: targeted tax cuts; government spending that can start today; and putting in place the building blocks so the UK can benefit from future economic recovery.

Tax cuts for families and pensioners living in poverty would assist the most vulnerable and have the biggest economic impact, because those with the lowest incomes will spend more of the extra income. Meeting the government’s target of halving the number of children living in poverty by 2010 would cost just £4bn.

Like cutting taxes for the poor, one benefit of direct government spending is that none of it will be saved. To achieve the goal of getting the maximum return for taxpayers’ money, the Treasury should go through the plans of every government department and council to identify spending projects that can start immediately. In addition, the government could establish a ‘Building Communities for the Future’ fund, allowing local people to identify facilities – community and day centres, charity facilities, social housing – which would benefit from immediate investment and refurbishment without the need for lengthy planning processes.

For example, in my own constituency of Leeds West, a new school building project has been delayed because the cost of a rebuild is 20 per cent more than the allocated funds. But, if it got the go ahead, work could start now, creating construction jobs locally and a legacy for the future in an area of high deprivation.

The final priority should be to invest in our future prosperity. We don’t know what the economy will look like in five years’ time – but we do know that there will need to be a rebalancing, away from financial services and retail and towards ‘knowledge-based’ industries with export potential. Our ability to compete in these sectors will depend critically on the investment put in today. Investments in fibre optics, green jobs and supporting entrepreneurship should all form part of the budget and will result in a more balanced economy, better able to withstand shocks.

April’s budget will give us an opportunity to provide support for families and businesses. The recession has forced us to take a long look at UK plc. Are we structured to benefit from the industries and technologies of the future, and how can government support innovation, enterprise and entrepreneurship? The budget should focus on getting money to the poorest families, investing in public works with immediate returns and investing in our future prosperity. Working with our global partners, the April budget will contribute to those efforts.

Rachel Reeves is Labour’s prospective parliamentary candidate for Leeds West and a former Bank of England economist

01 Mar 2009 16:56

 

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