This shotgun marriage of minds between Labour and the Tories won't last

25 July 2009

Irwin Stelzer reviews the week in politics

It just might be that out of the shouting at Prime Minister’s Questions, the sallies and charges, a set of sensible fiscal and financial policies is emerging.

The leader of the opposition is right: Labour is planning to cut capital spending in half in the next few years. The Prime Minister is also right: the cuts result from a decision to bring forward into these recession years spending that had been planned for what policymakers call ‘the out years’. That decision inflates spending this year, but will reduce it in later years, unless when the time comes Brown can’t bring himself to ‘cut’, which might be the reason he has cancelled next year’s comprehensive spending review.

Meanwhile, Brown is right: if you look at a several-year total, he is not cutting spending, and the Tories are right that if you compare later years with this one, he is indeed doing just that. That out of the way, we can ask the important question: is the Brown plan to move spending forward a good idea — Keynes at his best?

The Tories have certainly proved that Brown, who is running a record peacetime deficit of 12 per cent of GDP and has the nation’s debt heading to a staggering 90 per cent of GDP, finds it difficult to use the word ‘cut’ in connection with spending. But they have not even hinted that they would do anything different. Good thing. For the only thing they could do differently would be to cut capital spending now, in the midst of a recession. Keynes might have been right that government should make up for the decline in private-sector investment and spending, or he might have been wrong. No one really knows. But if he was right, and the Tories cut spending, the recession will deepen and lengthen. If Keynes was wrong, and spending is not cut, there is a risk that the private sector will remain on the sidelines, and that inflation will get out of hand. But presumably Mervyn King is alert to that problem and can leaven a bit of government Keynesianism with a dollop of Milton Friedman’s advice to contract the money supply, and head off inflation.

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