Dominic Lawson: Keynes is not enough, Mr Darling

What exactly does the Chancellor mean by saying that "much of what Keynes wrote still makes sense; you will see us switching our spending priorities to areas that make a difference"? Presumably he doesn't mean that hitherto he had been busy prioritising spending on areas that don't make a difference.

What he actually means, I imagine, is that public expenditure must be focussed on the way best calculated to create employment in industries facing the most dramatic contraction, notably construction. John Maynard Keynes was famous for having developed the idea of so-called "counter-cyclical" public expenditure: in other words the state should fund a programme of public works at a time of industrial depression, to avoid an ever greater downward spiral of reduced personal spending power and still greater unemployment.

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The problem is that the Government have already engaged in excessively "pro-cyclical" financial polices: that is, they sharply increased public expenditure during the boom times, with the result that they have already incurred prodigious amounts of debt. According to a report published today by the Centre for Policy Studies, the true level of public debt in the UK is no less than 127 per cent of GDP. The CPS has included the debt incurred by the nationalisation of Bradford & Bingley and National Rail and unfunded public sector pension liabilities, but even its eye-watering figure (almost £1.9 trillion) excludes the cost of the bail-out of the banks.

Since a dramatic increase in public expenditure above these already distended levels would lead to a run on the pound, and therefore the loss of any chance of a sharp drop in domestic interest rates, the Chancellor is casting around for someone other than the Government to do the pump-priming. His eyes have already lit on the saps in question: step forward, the humiliated commercial banks – or at least those who have taken taxpayers' money to fund their recapitalisation.

At an all-night meeting with Mr Darling and Treasury officials just over a week ago, those banks apparently agreed to maintain their levels of lending to home-owners and small businesses at the same levels seen in 2007, in return for billions of pounds of taxpayers' money. My first thought on learning this was that both the Treasury's officials and the bankers had been driven insane by lack of sleep. It was precisely that excessive lending on the back of an asset bubble which led to this crisis in the first place, as has been described with most elegance by Dr George Cooper in his awesomely lucid new book The Origin of Financial Crises.

After a while, I began to see what was going on. Alistair Darling believed that he had no choice but to help recapitalise the banks – but he needed to be able to tell voters that they would be getting something in return: an undertaking by the banks to be nice. The bankers, meanwhile, have a get-out from what they must realise better than anyone is a crazy commitment. They will indeed continue to offer mortgages and loans to small businesses – but the terms available will be ones which only those with very strong personal or corporate balance sheets will be able to contemplate: or as Sir Tom McKillop, the outgoing chairman of RBS put it with deliberate opacity: "Right now there is more supply than there is demand [in mortgage finance], albeit the credit metrics and pricing have moved."

Perhaps RBS minus McKillop will succumb to pressure from its new government-sponsored directors to lend on non-commercial terms to small businesses and would-be home owners; in which case such a bank will become a repository of even more bad debts, capital will flood out, and it will struggle to pay the 12 per cent annual interest demanded by the state in return for our investment.

It's more likely that the other board members will point out to their new colleagues that the entirely nationalised Northern Rock is implementing a repossession rate for delinquent mortgagers double that of the home-loan industry as a whole. If the Government is not prepared to order a bank it owns outright to treat the mortgage market as a charitable activity, it can hardly expect banks owned in large part by the nation's pension funds and insurance companies to behave in anything other than a purely commercial fashion.

So if the newly part-nationalised banks are not going to "prime the pump" and if the state of the public finances preclude the sort of Keynesian counter-cyclical investment recommended by financial commentators who have conveniently forgotten where that led in the 1970s, what is left by way of a cogent policy response to the deepening recession?

The new Business Secretary, Lord Mandelson of Foy, has the right idea by examining all the additional costs that the Government has been planning to impose on businesses – such as extending paid maternity leave from 39 to 52 weeks – and either postponing or cancelling them. It obviously makes sense to reconsider anything which amounts to an increase in the cost of employment, if it is higher rates of unemployment which the Government seeks to prevent.

Perhaps I could make a modest proposal, which would not involve the poorest families evading starvation by devouring their own children. The English planning system is possibly the most cumbersome and dilatory in the developed world. It can lead to big capital projects being delayed interminably or even abandoned altogether. It is, above all, the bane of the construction industry, which is now feeling the brunt of disinvestment to a greater extent than any other sector. It is this that has caused unconscionable delays in the building of new school premises to replace the excrescences put up in the 1960s – which for unfathomable reasons are thought worth preserving by "Heritage" organisations with more influence than taste.

Even if Peter Mandelson is defeated by his colleagues over his plans to lower businesses' costs of employment, he can surely persuade them of the need for a bonfire of planning regulations. Perhaps he should announce it on 5 November; either that, or it's the economy which will be going up in smoke, along with Guy Fawkes.

d.lawson@independent.co.uk

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