John McDonnell, Labour’s shadow chancellor, has launched his party’s election campaign with a radical plan to increase public spending in Britain. He said a Labour government would invest ‘on a scale never before seen in this country’. It would add up to £400bn over ten years. That’s more than double what it had previously planned. Mr McDonnell said it will not just transform the public services but boost economic growth and the overall size of the economy. His Conservative counterpart, the Chancellor, Sajid Javid, said the plan was ‘fantasy economics’. Other critics say it not only involves huge risks with the public finances but not even be practically feasible. So does the plan offer the transformation it promises, or is it risky and unworkable?
Labour has always been the party of public spending. That’s not surprising since many of those people who vote for it tend to depend more on public services than do Tory voters, many of whom can afford to pay privately for services they may need. And Labour voters, usually on lower incomes, have to fork out less in tax in absolute terms than do Tory voters to pay for day-to-day services. So Labour has traditionally been the party that both spends more and taxes more, and the Tories the party that tries to reduce spending where it can so that it can also cut taxes.
This election is different, though, because both parties are turning on the spending taps. Mr Javid has already announced increased day-to-day spending of £13.8bn a year and plans to increase public investment (capital spending) by £100bn over five years.
This is easy to explain. After nine years of austerity, imposed in order to bring under control the huge increase in public borrowing after the financial crisis, pretty much everyone agrees that public services are in dire need of extra cash and investment. And since the Tories’ electoral strategy depends on winning Labour seats in the Midlands, Wales and the North of England, the party needs also to persuade former Labour voters wavering in their allegiance that the Conservatives are no longer the party of austerity but can now be trusted with their votes.
The result is that, whatever the outcome of the election, Britain is heading for a period of much higher public spending. Earlier this week, before Mr McDonnell announced Labour’s updated plans, the think-tank, the Resolution Foundation, said that both parties were sending levels of public spending back to those last seen in the 1970s. Conservative plans would take annual total government spending as a proportion of national income to 41.3% by 2023; Labour’s original plans to 43.3%. In the twenty years from the mid-1980s to the financial crash of 2007, the average figure was only 37.4% up from 42% from the mid-Sixties to the mid-Eighties. So we are in for a big change whatever happens.
Labour has made clear that it intends to tax the rich and business much more to help finance its proposed increase in day-to-day spending. But on Thursday Mr McDonnell announced a huge increase beyond previous plans in the amount a Labour government would spend on capital investment. At the 2017 election it offered a £250bn investment plan over ten years. Now it is advocating spending £400bn over that period. The money to pay for it would be borrowed.
The plan consists of two ‘transformation’ funds. One, the social transformation fund, will invest £150bn in areas such as housing, transport and schools. The other, the so-called “green” transformation fund, will spend £250bn on measures associated with tackling climate change. The respected think tank, the Institute for Fiscal Studies, described the scale of the plan as ‘wholly unprecedented’.
Mr McDonnell defends his approach by pointing to the advice of international economic bodies such as the International Monetary Fund, the World Bank and the Organisation for Economic Cooperation and Development. They all advocate that governments should exploit the current very low levels of interest rates to borrow in order to invest. In principle, the Conservatives accept the same logic. Both also claim that well-directed public investment can boost the country’s productive capacity and so its potential for increasing economic growth. So the difference between the two is one of scale rather than economic theory.
On Thursday Mr Javid said that a returning Conservative government would impose a limit of 3% of national income on the level of government borrowing. Mr McDonnell also claimed to be ticking to Labour’s own ‘fiscal credibility rule’ but he altered the way it would be calculated.
What worries many about Labour’s plan is what happens if (some say when) interest rates start to rise. The cost of servicing the hugely increased pile of government debt would rise with them, imposing additional strains on the government’s day-to-day finances. Similarly, if the rate of economic growth failed to pick up as much as expected, which it could well do for reasons beyond any government’s control, then Chancellor McDonnell would have a lower-than-expected tax base on which to raise the revenue needed to service the massively-increased debt.
If both or, indeed, either happened then a Labour government could well find itself facing a major financial crisis. It would confront the choice of raising taxes or cutting back on its investment plans. Historically governments have tended first to cut the capital spending for the simple reason that voters don’t feel the effects so sharply and immediately as having their taxes put up. So in that world much of the vaunted transformative investment promised by Mr McDonnell on Thursday simply wouldn’t take place. As Paul Johnson, the director of the IFS, put it: ‘The risk is that you have a mini-spending boom and then, either because of Brexit or some other reason, you have another recession and debt starts to spiral, and you’re forced into some form of retrenchment’.
And there are other grounds for serious scepticism about whether Labour will deliver the ‘once in a generation’ change it is promising. It’s one thing to make big, ambitious plans to invest, it’s quite another actually to put them into practice. That requires having enough trained construction workers, the right people with the right skills and at the moment they simply do not exist. Another potential barrier is getting the planning permission that would be needed for all the new projects. These things take time. Very few specific projects are yet, in the jargon, ‘shovel-ready’ and many will have to wait until policies have been changed on such issues as the apprentice levy and increasing the money spent on training courses in further education colleges.
Furthermore Labour says the way government implements its investment programme itself needs radical change, shifting power away from London to the regions. That will require first setting up regional offices to administer the plans. Such changes first need to go through parliament and then the attendant bureaucracy needs to be set up. All that takes time too.
All this explains why Labour’s opponents are claiming that Mr McDonnell’s new plans are as much beset by practical problems as they are by economic risk. To which Mr McDonnell would no doubt retort: ‘Well, they would say that, wouldn’t they?’ And in an election, what one party offers has to be measured up against what the others propose. During this long campaign there will be time to give close scrutiny to the Conservatives’ own economic platform as well. But what, in its own terms, should we make of Labour’s plans? Do they offer the opportunity for the scale of transformation Mr McDonnell says we have never seen before? Or is it all fantasy stuff that might well end only in tears?
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