Chancellor Sajid Javid’s approach to the spending review is in danger of stopping the Boris-inspired Tory revival in its tracks. The Chancellor needs to think more like an entrepreneur and less like he’s a newly-wed on a tight income.
He intends to stick to the current spending rule that the annual deficit should not exceed 2 per cent of GDP in 2020-21 and plans to reduce total government debt as a proportion of national income. There is to be extra money for the police, health and education but other areas will continue to face strict controls. He likes to compare government spending with household expenditure. As every household knows, he says, it is necessary to make choices and choose priorities, but his homely analogy is irrelevant. It is just plain bad economics.
Entrepreneurs do not fix their borrowing as a percentage of sales revenue. They ask if borrowed money would create an asset that can be sold to repay the debt or produce an income that will allow the debt to be paid back. Investing in house building is urgently needed and would produce assets that could either be sold or used to earn rental income sufficient to cover the capital and interest. The same could be said of borrowing to invest in the internet and other infrastructure.
The government needs to re-write its fiscal rules to take account of the full economic consequences of borrowing. The primary question should be: ‘Is it repayable?’ Any amount of borrowing is justified if it will allow the creation of assets valuable enough to repay the debt and interest in full. That should be the criterion, not borrowing as a percentage of GDP.
The Chancellor has learnt nothing from the Reagan era, when the policy of Republican fiscal hawks was sidelined, or from the 2008 recession, which was overcome by money creation and borrowing.
It’s time to chuck the fiscal rules of the 2010 Coalition and to start thinking like business leaders with long-term plans for expansion. Or better still, start thinking like one-nation Tories who want to achieve liberty and prosperity for all. We need less fiscal cheese-paring and more examination of the full economic and social outcomes of repayable borrowing.
David Green is Director of Civitas
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