Marcus Wood

Will the New Labour spending splurge include the Kingskerswell bypass?

The Labour Government have decided that the best answer to the deep hole the country is in is to keep digging. The idea that the way out of an economic crisis brought on by too much debt is to borrow more money is utterly bizarre.

The Government argue that a sudden increase in State spending can alleviate the worst effects of a recession, an argument that sounds sensible enough on paper but falls at the first hurdle on closer examination.

The main reason that there is a crisis in the first place is that the other side of the borrowing/lending deal – the lenders, have got cold feet. It’s not banks that have the money to lend; it is the people that deposit with them. These people have become rightly concerned about the ability of many bank customers to repay their debts.

So everyone still wants to borrow (in fact in a downturn borrowing requirement goes up) but the banks stuck in between have to persuade their creditors that they are lending responsibly to attract their funds in the first place. As a consequence there is a lot less money around; and because there is less of it the price (real interest rates) have shot up.

If you are sitting on a pile of money you need to lend it but you only want to lend it to the safest borrower imaginable; and easily the safest borrower is anyone who can’t go bust – a big Government like HMG is perfect. So as soon as the Government starts serious borrowing they start competing (and beating hands down) with the very businesses and firms they say they are so keen to help. This has the effect of driving the interest rates that these ‘less safe’ people have to pay even higher and means that fewer firms will be able to borrow at all.

What a blatant ‘tax and spend’ policy like this undeniably does is to shift even more of the economy out of the hands of individuals and businesses and into the dead grip of Government. When this last happened last time in a big way after second-world war, it brought us 45 years of relative economic decline.

This is because Government spending rarely creates economic activity; it more often destroys it. State projects and Government machinery create non-productive activity – and worse they create jobs which suck talent out of the labour pool; meaning business’ cannot always grow even when they want to because they can’t attract staff who are enjoying security; a top salary and an index-linked pension in the public sector.

In any case big infrastructure projects like the Kingskerswell Bypass take years to start, let alone finish, and by the time they are providing work in construction it is highly likely that the building slump will be over. We can live in hope that this is one piece of Labour spin that might help us, but I won’t hold my breath.