Labour and Tories launch bidding war on spending
Javid and McDonnell pledge to invest billions in capital projects
Labour and the Conservatives turned the election into a public-spending bidding war yesterday, promising massive programmes of borrowing that would return public investment to levels last seen in the 1970s, according to leading experts on the public finances.
The Institute for Fiscal Studies said plans unveiled by Sajid Javid, the chancellor, and John McDonnell, his Labour shadow, would represent a decisive break with the past but warned that a future government might have trouble delivering projects on the scale envisaged.
On a day dominated by the ditching of austerity by both main parties, Javid’s plan to spend an extra £20bn a year on capital projects such as roads, railways, schools and hospitals was trumped by McDonnell’s proposal to increase infrastructure investment by £55bn for each of the next five years.
Labour would more than double net capital spending to £100bn a year, catapulting Britain from near the bottom of the international public infrastructure league table to near the top. Capital spending would be close to 5% of GDP – a level last seen at the time of the IMFimposed cuts in 1976.
In a speech in Liverpool, the shadow chancellor said Labour would exclude borrowing for investment from borrowing targets. McDonnell, who said his plan was “in the best tradition of British socialism” and in the footsteps of Hugh Dalton and Gordon Brown, also promised to shift significant decision-making power to the north.
Asked after the speech whether the amount pledged could spook money markets and lead to interest rate rises,
‘Austerity Britain is going to turn into hard-hat Britain whoever wins the next election’
James Smith Resolution Foundation
McDonnell said: “Our scale of investment matches the scale of those emergencies that we now face, on climate change and socially. I’ll tell you, if we didn’t set off on that march, future generations would never forgive us.”
Javid condemned Labour’s plans as “fantasy economics” but unveiled his own plan of extra borrowing to fund spending on capital projects, while ripping up the fiscal rules imposed by his Tory predecessors in the Treasury.
Speaking at an aircraft hangar near Manchester, Javid loosened borrowing constraints to the tune of £20bn a year while attacking Labour for planning to “saddle the country with debt”. He drew a line under the era of George Osborne and Philip Hammond by setting a new cap on borrowing for investment at 3% of national income, while day-to-day current spending would be balanced. That would allow borrowing to
rise from £47bn this year to about £70bn, and then keep rising as the economy expands.
Apart from a brief period during the financial crisis and recession of 200809, investment spending has not been at 3% of GDP since Margaret Thatcher reached No 10 in 1979. Javid said now was a responsible time for this because interest rates were negative for the government and it was a moment for “new rules for a new economic era”.
Ben Zaranko, research economist at the IFS, said: “Both parties’ plans would represent a sharp change in policy, and Labour’s plans are especially ambitious. The key challenge for a government seeking to deliver investment on this scale – particularly in a short timeframe – will be finding worthwhile and viable projects in which to invest.
“Shortages in the number of suitably skilled construction workers, a dearth of ‘shovel-ready’ projects, and practical issues relating to delivery will be challenges the next government will need to think carefully about how to overcome.”
James Smith, the research director for another major thinktank, the Resolution Foundation, said the parties’ plans “represent a dramatic shift from the narrow debt-driven debate that has dominated the past decade”. He added: “With the low cost of borrowing, austerity Britain is going to turn into hard-hat Britain whoever wins the next election. This shifts the focus to ensuring that investment delivers real returns, not just higher debt.
“There remain big differences between the main parties’ economic plans, which will be fought over in the election. But the even bigger difference, following today’s speeches, is between the recent economic past and plans for the future, as both parties have signalled a major shift towards a far bigger, investment-focused state.”
Public spending on investment projects was cut by Osborne after his arrival at the Treasury in 2010 as part of the Tory-Lib Dem coalition’s attempt to cut the budget deficit. During the 2010s, it has averaged about 2% of GDP.
The announcements by Javid and McDonnell came as the top civil servant blocked publication of a report by the Treasury’s economic forecaster that was expected to show the public finances had deteriorated in the past eight months and that the chancellor was in breach of his old fiscal rules. Mark Sedwill, the head of the Cabinet Office, told the Office for Budget
Responsibility’s chair, Robert Chote, that publication would breach the Cabinet Office’s general election guidance. But the Lib Dems said the decision “smacked of political interference”.
The British Chambers of Commerce welcomed the promise of more infrastructure spending but struck a note of caution about the scale of Labour’s plans. “Our business communities will agree with John McDonnell on three fronts: the UK needs more public investment in infrastructure, more focus on upgrades in the regions, and more decisions taken locally, rather than in Westminster,” said Adam Marshall, its director. “We may agree on the aim – but businesses will raise real questions about how Mr McDonnell plans to get there.”
Dave Prentis of the Unison union said Javid’s pledges did not go far enough: “After nine long years of spending cuts, this is nowhere near enough to repair the damage done to budgets, services and staff in hospitals, schools, police stations and town halls across the country.”
▲ Jeremy Corbyn joking with press photographers as Labour unveiled its battle bus in Liverpool yesterday