Remember Gordon Brown’s ‘golden rule’ – that over the course of the economic cycle the only net borrowing he would allow was to fund investment? As for current spending, he told us, he would pay down debt in the good times so that he could borrow in the bad. It sounded reassuring, until Brown started to fiddle with the figures in every conceivable way. He shunted debt off the public balance sheet via private finance initiatives.
Is anyone confident that Reeves really will invest her extra £20 billion a year in such a way that it will earn the taxpayer a return?
He kept stretching out his idea of the economic cycle, so it seemed that we would never get to the end of it, obviating the need ever to balance the books. As for investment, he kept broadening his definition of that, too, so that virtually anything counted. Schools, hospitals, welfare – it was all about investing in people.
Reeves has been Chancellor for less than four months but already she is at the same trick, redefining her fiscal rules so that she can borrow an extra £20 billion while still – notionally – realising her target of having the ratio of government’s debt to GDP falling by the end of this Parliament. ‘I won’t cut capital budgets to make up for shortfalls in the day-to-day running costs of departments,’ she says.
How has she achieved her fiddle? By widening the public assets which can be set against government borrowing. In future the student loan book, for example, will presumably count as an asset – which would be fine if it didn’t have echoes of the sub-prime loans which nearly felled the global economy in 2008. According to the Office for Budget Responsibility 37 per cent of the money borrowed by students will never be repaid, even after the tighter rules introduced by the previous government.
Investment is, of course, generally a good thing, or at least it is if it is a wise investment. But is anyone confident that Reeves really will invest her extra £20 billion a year in such a way that it will earn the taxpayer a return? Contrary to her assertion that she won’t cut capital budgets to fund day-to-day expenditure, she has in fact already done that by cancelling road projects including the much-needed Stonehenge tunnel while at the same time awarding fat pay rises to train drivers, doctors and other public sector staff.
But things could be about to get worse. One of the suggestions is that Reeves will chuck money at UK ‘giga factories’ making batteries for electric cars in an attempt to revive car manufacturing. The previous government, it might be remembered, has already tried that one, by backing a Britishvolt factory in Northumberland – and was left with nothing but weeds.
Sweden’s effort to establish a European car batter industry in the shape of Northvolt has, too, run into problems. China has cornered the market in batteries for electric cars, and Britain is certainly not going to be turning that around so long as it has the highest commercial energy prices in the world – unless someone can develop a convincing new technology to blow the opposition out of the water.
Wise heads, such as the UK engineering company Johnson Matthey, have withdrawn from trying to trying to enter the business of mass car battery manufacture, realising that in a high-cost country like Britain the opportunities lie in smaller-scale, bespoke manufacturing. But governments rarely have such insight. They prefer to chuck taxpayer money at very visible and prestigious industries, such as cars and planes, rather than the dull ones which actually make money. There is little reason to think that things will change with the present government.