Hang on, what is this? Sajid Javid, a Conservative chancellor, promising to spend like a drunken sailor, doubling the annual deficit to £55 billion by next April?
If you want to know why what Sajid Javid is proposing is quite sensible, relative to the challenges we face, let me introduce you to two new fashionable economic buzz words: “investor strike” and “reversal rate”.
If you want to know why his Labour counterpart John MacDonnell’s plan is very dangerous you must, by contrast, think from first principles.
Let us start with the buzz words. Investors, when it comes to Britain, are on strike. Private sector investment has gone off a cliff. There are almost no flotations happening on the stock market. Bank lending is flatlining and companies are actually saving money. They have a record 38% of GDP in cash on their balance sheets.
The lack of private sector investment comes in the wake of a similar shortfall in public sector investment. In order to balance the books, George Osborne slashed investment and we are still living with the consequences.
What is particularly peculiar about this investor strike is that it comes at a time of near-record low interest rates. Take a look at mortgage rates, for instance, or the 10-year gilt rate, currently 0.7%. These are rates even lower they were in William Gladstone’s time.
This leads us to the second buzz word. The reversal rate. This is the level below which a fall in interest rates becomes counter-productive. Banks can no longer lend profitably. Businesses and consumers, fearing the worst, hoard cash on deposit or under the bed, thereby driving interest rates down further.
Central banks, like the Bank of England, see economic growth come to a standstill and reach for the traditional lever of cutting interest rates to stimulate the economy, only to realise that will only make things worse. If monetary policy is exhausted, the only option is to reach for fiscal policy, in other words, tax and spend, the remit of the Treasury at the other end of town.
This is what Sajid Javid is proposing. He is intending to balance the current budget, on day-to-day-spending, but to borrow £60 billion a year to invest in infrastructure. Given the paucity of other opportunities, investors will be only too delighted to fund such much-needed stimulus. And if interest rates go up a tiny bit, so what? It will be a relief.
No doubt there will be plenty to quibble about how Mr Javid would spend the money. I would personally prefer far greater focus on tax cuts, including the abominable stamp duty, and cutting the payday interest rate on student loans. Prepare, instead, for “investment” in public sector pensions. But with Britain near the bottom of the OECD league table for investment in recent years, his approach is surely a sensible one. Critically, it is also compatible with continuing as a commercial, market-based society where property and individual rights remain intact.
