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Saving and investing now rather than later

Social Market Foundation suggests switching spending

An interesting SMF paper, Osborne's choice, just out suggests that the government can boost investment by spending the money that will be 'saved' by the £15bn of unspecified spending cuts it promises after the next election.  The reasoning is that given the spending cuts have to be found at some point, and probably before the election, the government might as well identify and implement them now and use the £15bn per year to raise the capital budget.

The author, SMF director Ian Mulheirn, proposes examples of where the money could be saved: cuts to winter fuel payments and free TV licences for the better-off elderly , halving the high rate tax relief on pensions, limiting ISA holdings, folding child benefit into the tax credit system, and scrapping free bus passes for the over 60s.  The funds saved would then be channeled into capital spending eg on infrastructure.  Capital spending can raise the productive potential of the economy and so help boost growth in the short and longer term.

The central point here is that rather than just debate about austerity vs growth we should look at where we spend; some items are better for promoting growth than others.  This is a point I made in the Fabian Society pamphlet The Credibility Deficit last year.  It does mean hard choices ie cuts to current spending (which people usually notice) to shift to capital spending (which most people, apart from those directly employed on projects) will not, at least at first.  For Labour this is just a debate we need to have.

I do have some doubts about the reliance on the £15bn future cuts.  That amount, £15bn, in a few years time, is neither here nor there in the context of the public finances.  It is a meaningless figure.  Sure, the government has not explained where that cut will come from.  But it doesn't really have to as the figure will be different by the time we get there.  It could well be larger.  The government will hope it is smaller or even non-existent.  Its current presence in the OBR and government figures is a way of saying the government will meet its target (later than expected) - honest.  But no one knows.

That doesn't mean we shouldn't look at reallocating some current spending, even £15bn.  Finding it will not necessarily be politically easy.  But the scale of the economic crisis we face means we have to be radical in reorientating our economy towards growth.

Stephen Beer, 21/02/2012

At the Eastern Region conference and with the Richmond Fabians.
As the Budget approaches, is it right to increase borrowing to try to stimulate growth?
Will Hutton suggests so in an interesting Observer article - but it's ultimately a matter of demand and confidence.