Jeremy Warner's Outlook: Britain to spend its way out of trouble as borrowing soars

Labour wants to spend its way out of recession; the Tories want to cut taxes for small businesses instead. Ever since New Labour came to power, politics has been an homogenised mix of touchy feely, third way blandness, with little substantive beyond rhetoric, history and personality to choose between the two main parties. The economic downturn promises to produce a clearer differentiation once more.

Yet the effect of these rival policy positions in terms of public borrowing is much the same. Whether the Government spends more or taxes less, it will all have to be paid for through higher borrowings. As new figures announced yesterday reveal, there is limited scope for more borrowing.

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Already the budget deficit is at ruinously high levels, but in complete disregard for the fiscal rules that until just a few months back were meant to govern Labour's every move, as well as banish the boom and bust of previous cycles, the Government now promises to abandon all caution and let rip. The budget deficit in the six months to the end of September was at its highest in nominal terms since records began.

Even the Chancellor has stopped believing the deficit for the fiscal year as a whole will come anywhere close to the official Treasury forecast of £43bn. Most outside forecasters now predict £60bn or more, swelling to over £100bn next year. In real terms, this would be somewhat higher than the deficits clocked up in the recession of the early 1990s. It might also be higher as a proportion of GDP.

The one redeeming feature for the public finances is that by historic standards, total public debt as a proportion of economic output is still comparatively low at a little under 40 per cent. This won't remain true for much longer. Even ignoring the hundreds of billions of pounds being lent or spent bailing out the banks, public debt is set to soar.

Count in the off-balance sheet spending financed through public-private partnerships, and the numbers look more alarming still. If you were to adopt the accounting procedures forced on companies, and count in future pension liabilities too, you might reasonably view the Government as more bust than Enron and Northern Rock.

Much moralising twaddle has been written and said about living beyond our means during the credit-fuelled boom of the last ten years, but that hasn't stopped everyone looking hopefully to the public sector to borrow our way to economic salvation.

The credit crunch has ensured that individuals and businesses are finding it ever more difficult to borrow, but the state seems to be able to lay its hands on as much as it likes, on ever dec-reasing rates of interest. Are we not just swapping one debtors' jail for another?

Classic Keynesian theory points to spending on public works, rather than tax cuts, as being the most effective way of reflating an economy. With tax cuts, the danger is that the injection of new money goes mainly into paying down borrowings or saving more, and therefore has limited economic benefit. Public spending, on the other hand, produces an immediate "multiplier effect" in boosting spending and demand across the economy.

The downside is that such spending tends to go into pork barrel projects that buy votes and in any case may in the short term be incapable of doing the economy much good. Large-scale infrastructure projects take time to plan and develop. Capital spending pre-viously thought to be several years off is not so easily brought forward.

Both approaches seem to have their drawbacks. Borrowing our way out of trouble only piles on the misery for future generations, who must eventually pay the money back again.

Historically, all big debt overhangs of the type we have seen accumulate across large parts of the developed world always end in recession. We may be able to borrow our way out of an outright depression, but however policymakers cut it, they won't be able to avoid a long and difficult work-out. The shutdown in production at Nissan's Sunderland plant is only the latest example of the deepening consequences of the credit crunch. Swapping private for public debt may help ease the pain a bit, but it may also prolong it.