Doping the economy

An outsider viewing the Olympic opening ceremony could easily have gained the impression that Britain was in the midst of an unprecedented boom. A week on Sunday we are promised an equally spectacular closing ceremony. For the moment, the cost of staging the Olympics — £9.3 billion for the games, including £80 ­million for the opening and closing ceremonies alone — has been laid aside in a rush of public enthusiasm. The biggest source of discontent this week has been the rows of empty seats reserved for the IOC’s politburo and their associates.

After any big party, of course, there is the risk of a big hangover. The Olympics will be no exception. Come September, the news agenda will return to the underlying story of 2012: the painfully weak performance of the British economy. The US economy has now surpassed the size it was in 2007 and is growing. The UK economy is 4 per cent smaller than it was in that year, and notwithstanding the optimism of Philip Delves Broughton on page 22, it looks certain to keep shrinking. Many will seek to blame the poor performance of the British economy on the government’s austerity programme and demand the economic equivalent of performance-enhancing drugs: more government spending. But it would be a dangerous folly.

A Keynesian pump-priming operation is one thing if — as Keynes himself advocated — a government runs a surplus during the good times to provide the cash for spending during the bad. It is quite another thing when a government has run up a huge deficit during the good times. To carry on spending in such circumstances promises a Greek-style ending, with investors losing all faith in the government’s ability to repay its debts. In its dying months in office, the last Labour government came close to adopting a doctrine that all state spending is good — waste, big salaries and pensions included — because it was all pumping money into the economy.