Cuts in capital spending would be a breach of the principles of good housekeeping. It is a false economy to cut public infrastructure spending at the precise point in the cycle when it is cheapest. The index of tender prices compiled by the Royal Institution of Chartered Surveyors rose sharply during the late Eighties boom, and has been falling just as sharply since. Tender prices dropped again in the second quarter, and are now 22 per cent below their peak in the third quarter of 1989. The savings on any project undertaken now rather than in two years' time are likely to repay the extra costs of finance.
Building work is a bargain because the property boom resulted in massive oversupply. Private sector demand has now shrivelled. With construction workers, architects and surveyors out of work in increasing numbers, it is absurd to suppose that a maintained or even increased level of public spending on infrastructure would involve any direct inflationary risk.
Neither would such a counter-cyclical spending policy entail a more general risk to inflation through the spending of those employed on construction projects. The entire economy is operating way below capacity. Increased capital spending is likely to raise output, not prices, both in the short term and the medium term. Infrastructure spending helps the private sector to do business more efficiently.
True, the markets are worried about the prospect for the public finances and inflation in the medium term. But they are prepared to finance large public-sector deficits provided that there is an assurance that they will come down when the recovery gets under way, bringing in its wake rising tax revenues and falling public spending on items like unemployment benefit. They are also aware that you cannot construct the Jubilee line twice: once it has been built, there is an immediate saving in public spending.
Those fears about the medium term can be allayed in one of two ways, and there is a direct trade-off between the two. Either the Government can reform the institutions of economic policy-making, notably by making the Bank of England more independent, or it will have to re-establish its credibility by taking tough measures on current spending, taxes and interest rates. Since these would merely prolong the recession, we should all hope it opts for the former.Reuse content