24 October 2008
By Tash Shifrin
Chancellor Alistair Darling's Keynesian plans to increase public spending – and borrowing – in a bid to lift the economy stirred controversy this week as Opposition politicians attacked the government over the national debt.
The row came as figures released by the Office for National Statistics showed public sector net borrowing for September at £8.1bn – up from £4.8bn last September – bringing the total so far this year to £37.6bn, a 75% increase on last year.
Debt as a percentage of gross domestic product stood at 43.4%, including the effects of nationalising Northern Rock – well above the ceiling of 40% set out in the government's self-imposed fiscal rules.
The ONS figures were followed by a warning from Mervyn King, governor of the Bank of England. 'Over the past month, the economic news has probably been the worst in such a short period for a very considerable time,' he told a meeting of business leaders on October 21.
It 'now seems likely that the UK economy is entering a recession', while inflation had reached the 'worryingly high' rate of 5.2%, he said.
Darling has signalled that the government could turn to public spending as a means to shore up the economy in advance of next month's Pre-Budget Report. Public spending would be 'reprioritised', with a focus on creating employment, he told the Sunday Telegraph.
'At a time like this, it would be wrong for every reason to start taking money out of the economy, in terms of cutting back on spending, in terms of tax. You do not do this when an economy is slowing down,' Darling said.
Citing economist John Maynard Keynes as inspiration, the chancellor explained: 'You will see us switching our spending priorities to areas that make a difference – housing and energy are classic cases where people are feeling squeezed at the moment. They do expect the government at a time like this to help them. We'll do that and there'll be more examples like that.'
Projects such as Crossrail and developments for the 2012 Olympics would also boost the economy, he suggested.
A Treasury spokeswoman confirmed that this reprioritisation meant Whitehall departments would be able to bring their planned capital projects forward 'if they see fit'.
But economists greeted the move with caution. Charles Davis, senior economist at the Centre for Economics and Business Research, told Public Finance: 'It could be a useful short-term populist measure. But it's not clear that these things always work out in the long run for the best.'
The big infrastructure projects were 'important for the UK's long-term growth', but Davis added: 'If you try to boost spending further... in future that would mean greater tax rises and spending cuts.'
Tax rises 'could well come back as the economy is recovering and that would act as a drag on growth, that could well retard the recovery', he warned.
The Treasury appears to have paved the way for new capital projects by issuing revised guidance on refinancing Private Finance Initiative schemes.
Mike Harlow, a partner at KPMG's infrastructure advisory business, warned that the difficulties banks were facing could slow down imminent deals, with financing having to be put together through a 'club of banks'.
This troubled climate had also created an 'issue of pricing', he told PF. Projects signed off in the near future are expected to face price increases because of a three-fold rise in the credit margin charged by banks financing such schemes over the past year, he said.
Speaking before the guidance was issued, Harlow suggested that the government would have to 'reassess' whether the PFI was still 'a value-for-money way to procure infrastructure'.
The new guidance addresses the potential need to refinance deals to secure more advantageous terms in future, introducing a right for public authorities to request refinancing.
It also attempts to forestall huge windfalls for private contractors from refinancing schemes – something that has been heavily criticised in the past.
It sets new ratios for sharing the gain between public bodies and contractors, with the public authority receiving 50% of gains up to £1m, 60% for the next £2m and 70% thereafter.
In the Commons, Conservative leader David Cameron taunted the prime minister over the state of the public finances, saying that Gordon Brown had racked up 'one of the biggest budget deficits of the developed world'.
Brown, who followed King by acknowledging that Britain was facing recession, retorted that IMF figures showed the UK's net debt was lower than that in France, Germany and the US.
'We have the ability to borrow to take ourselves through the difficult times,' he said.
PFoct2008
