What goes round, comes around. The G20 is dusting off its pro-growth policies from the last financial crisis. Where does this leave the UK’s austerity strategy?
The Group of Twenty has come full circle. In April 2009 in London, the talk was all about a massive co-ordinated fiscal stimulus. While this was considerably exaggerated – much of the ‘trillion dollar package’ had already been announced – there was a genuine collective determination to do what was necessary to ensure the financial crisis did not become a prolonged depression.
And it worked, perhaps too well. By June 2010, in Toronto, it appeared that recovery was under way. The priority, in what the UK government described as a diplomatic triumph, was fiscal consolidation. The summit communiqué noted approvingly that ‘advanced economies have committed to fiscal plans that will at least halve deficits by 2013 and stabilise or reduce government debt-to-GDP ratios by 2016’.
It is now clear that this premature ‘pivot’ to fiscal consolidation, as the International Monetary Fund described it, was a huge mistake, both for the G20 as a whole and for the UK. The supposed commitment to halve the deficit by 2013 has been quietly forgotten, derailed by weak growth. At the June G20 meeting in Los Cabos, Mexico, the target was, rightly, more about growth and confidence than self-defeating austerity; although it is far from clear that this will translate into meaningful policy.
What does that mean for the UK? Politicians, perhaps even more than the rest of us, like the idea of getting something for nothing. But Chancellor George Osborne’s Mansion House speech in June was unusually frank in this respect. On the one hand: ‘The costs and risks of discretionary fiscal loosening… are real and significant.’ So, no more borrowing.
But on the other hand: ‘We can use the global confidence in our balance sheet to boost private sector growth. We are already taking action to support new house-building and infrastructure investment through government guarantees. In the next month we will set out how we can do much more.’
So, much more borrowing, underwritten by taxpayers.
In effect, he is saying: ‘Let’s borrow more without borrowing more.’ More debt is now a good thing, as long as it doesn’t count.
The most important point about the speech is that it marked the end of the economic argument about the need for more government borrowing and spending to support demand. No doubt the Treasury will find a way of ensuring that whatever guarantees are offered have no direct, short-term impact on the deficit.
But economically that is irrelevant. There is only a marginal difference between the government borrowing directly from the private sector to finance investment spending, and the government guaranteeing private sector borrowing that finances the same spending.
Of course, taking the financing off the balance sheet just for presentational reasons is opaque and potentially costly, as Martin Wolf of the Financial Times has pointed out. The most direct and efficient way to increase spending on infrastructure would be for the government to borrow directly. Long-term real interest rates are very close to zero – so we could have financed a £30bn infrastructure investment plan with the revenues raised from the now-cancelled ‘pasty tax’.
But, even within the government’s self-imposed restriction to off-balance sheet financing, there are three sensible things that could be done.
First, the government could kick-start house building by guaranteeing bonds issued by housing associations, secured on the income stream from new houses, as Tim Leunig and Tim Besley proposed in the FT in June. This could be coupled with an innovative approach to ensuring a supply of land with planning permission. With house building, especially of affordable homes, at historic lows and a structural shortage of supply, such a move would both boost demand in the short term and benefit the economy over the medium to longer term.
The second obvious thing to tackle is the rising rate of jobless young people. The Association of Chief Executives of Voluntary Organisations’ commission on youth unemployment, of which I was a member, argued that the long-term economic and social damage could be immense. It called for the government to help private and voluntary sector providers invest in reducing youth unemployment by promising a substantial future payment stream in return for demonstrated success. This could in turn enable providers to issue social impact bonds secured on those future payments.
Thirdly, the market for loans to small and medium-sized enterprises is dysfunctional. This both reduces business investment and hence output and employment in the short term, and holds back productivity in the longer term. The government could unblock the market and increase financing to the SME sector by creating a securitisation vehicle for SME loans, as Adam Posen, of the Bank of England’s Monetary Policy Committee has suggested. Such securities could then be purchased as part of the Bank’s quantitative easing programme, again underwritten by the Treasury.
All of these measures would boost demand, investment and employment. All would of course entail the government assuming some risk. And all would, in economic terms, constitute a ‘fiscal stimulus’. But none would add significantly to the measured deficit in the short term.
The priority now is for the government to turn words into action.
Jonathan Portes is director of the National Institute of Economic and Social Research. He will be speaking at the CIPFA conference being held in Liverpool on July 3–5
This article first appeared in the July/ August issue of Public Finance