Keynes to the rescue?

Chancellor Darling now reveals Brown's solution to our problems. We shall go for broke (or should I say bust?) They will spend our way out of trouble.

The pain is obvious if taxes are raised, as well as being inflationary. Tax cuts, which would also imply huge borrowing, wouldn't allow us to have the big construction projects we can't afford.

So borrowing huge sums, in addition to the massive borrowing over the past few years, and an even bigger splurge than those of recent years, seem to be the best way out for Labour.

There is no such thing as a free lunch, however. Someone has to pay. In earlier years the lefties used to tell us that a larger national debt doesn't matter, since it need never be repaid so long as the annual interest bill is met. They are right, of course, except that for every £100 billion borrowed, something like £5 billion a year must be paid annually in the future, or about 1.5 pence in the pound on standard rate income tax. It would be more, of course, if the debt were ever partly or totally repaid.

By the end of the year on normal budgetary items government debt will have already expanded by much more than this. This is expenditure on the never-never, with repayment in the future. Add on the never-never hospitals and schools built under the Private Finance Initiative, which the government likes to omit from its "balance sheet" and the steadily mounting bill for gold-plated final salary public sector extra employees recruited under Brown, and taxes will have to rise much higher in years to come. Future wage earners will have a very large tax bill.

Macroeconomics, of which Keynes was one theorist, is wont to ignore effects which arise from the fact that extra spending and income does not arise uniformly through the economy. There could even be shortages and bottlenecks which prevent expenditure generating jobs in some industries.

Most of all there are lags. Projects will take months to prepare, design, cost and approve, and many months to complete. So reflation could be very small for a year or two. Similarly, looked at from a monetarist perspective, lower interest rates and the consequent expansion in the money supply may not come fully on stream for a year or two. Borrowers have to take stock and work out their needs one or two years ahead.

Some experts are predicting a brief recession. If so, some of the large increases in expenditure could be made when the economy is well on the way to recovery and may even contribute to inflationary pressures. The government could even be causing the next problem.

Finally, we have already seen splurge without reform, which drives up wages, but otherwise makes little difference in output or employment. If much of the new spending goes on creating still more civil servants with gold-plated pensions, then the future could be even bleaker.

Something must be done to keep the waste of resources as low as possible. The problem is to achieve this while allowing any change in the pattern of production now required. It is the fatal conceit of all on the left to assume that because theory has provided nostrums it becomes a simple matter of pulling appropriate levers to achieve determinate outcomes. The real problem is that they are dealing with people ultimately, who may not act entirely as they expect, and with information which is inaccurate. There is every possibility that the results of their actions will be inadequate or even counter-productive.