Javid rips up rules in £300bn investment
SAJID JAVID unveiled a £300bn investment spree as he tore up borrowing rules and reversed decades of Conservative policy with a pledge to revamp roads, railways, schools and hospitals.
The Chancellor said he will not use debt to fund current spending, such as benefits and wages, but will take advantage of rock-bottom interest rates by borrowing up to 3pc of economic output per year to invest.
This is unprecedented in recent history and marks a dramatic departure from the Tories’ focus on tight restrictions on public finances. It could revive the UK’s ailing infrastructure, trigger a surge in economic growth and create thousands of jobs – but it triggered criticism of the party’s reputation for sound financial management from fiscal experts, including former Treasury mandarin Lord Macpherson.
Meanwhile, shadow chancellor John McDonnell promised an even larger £150bn “social transformation fund” over five years, on top of £250bn for investment in green infrastructure over 10 years, and renationalisations expected to cost a lot more than £100bn.
This all comes against a gloomy economic backdrop. The Bank of England cut its growth forecasts as the global economy weakens and Brexit weighs down domestic growth.
Mr Javid said: “Incredibly, at the moment we can borrow in real terms at negative interest rates, meaning it is a responsible time to invest. While we must maintain spending restraint, if we want growth to continue and get stronger in the future, we need to invest in it, taking the opportunity offered by those historically low borrowing rates.”
Currently investment plans are expected to cost just more than 2pc of GDP, so Mr Javid’s 3pc would increase spending from around £200bn to almost £300bn over the next four years.
He said debt would still fall as a share of GDP, and an extra rule would cap borrowing if debt interest payments rose beyond their historic share of GDP. Mr Javid said: “The combination of these rules means debt will never be allowed to get out of control.” Mr McDonnell said Labour would exclude investment spending altogether from its fiscal targets as infrastructure and nationalised businesses give the state an asset alongside its debt.
Bank of England Governor Mark Carney hinted the spending commitments of both main parties could push interest rates higher.
He said: “One of the advantages of monetary policy is that it is much more nimble than fiscal policy and therefore we can respond accordingly. There are upsides and downside risks in any forecast, and one of the upside risks to this forecast would be around future fiscal policy … We would take those into account, not as manifestos but as actual government policy.”
The Bank has already estimated that Mr Javid’s £13.4bn largesse in September’s
spending review will add 0.4pc to growth next year.
Business groups and economists welcomed the extra investment, but warned against letting debt run away.
The announcements came after the spending watchdog was forced to cancel its planned update on public borrowing because the Cabinet Office said civil servants should not publish data so close to an election.
‘We need to invest … taking the opportunity offered by historically low rates’
Chancellor Sajid Javid eyes up a £300bn investment spree as he unveils the Conservatives’ plans for the economy, in Manchester yesterday