Mehdi Hasan: You can raise spending and balance the budget

For this Conservative-led Coalition, shrinking the state seems to take priority over getting growth

Share
Related Topics

According to legend, the Gordian Knot couldn't be untangled. Alexander the Great, however, had other ideas. After struggling with it for several minutes upon his arrival in the town of Gordium in 333BC, the frustrated young king pulled out his sword and just cut through the knot. I guess that's why they called him "the Great".

In recent years, less impressive leaders have struggled to untie their own Gordian Knot: how to stimulate economic growth without adding to the record budget deficit? Stimulus itself has become a dirty word; the political and media elite is obsessed with reducing borrowing by slashing spending. Yet the UK economy continues to flatline: growth is anaemic and unemployment, at 2.7 million, stands at a 17-year high. John Maynard Keynes's dictum that "the boom, not the slump, is the right time for austerity at the Treasury" has been consistently ignored by Treasury ministers.

Meanwhile, across the Atlantic, Keynesian economics has been vindicated. The US economy is growing much faster than the UK's, off the back of Barack Obama's $787bn stimulus package. America is enjoying 24 consecutive months of job growth, with the US unemployment rate now below our own.

Here in the UK, however, the Keynesians have lost the political debate. There is no point pretending otherwise. David Cameron is happy to watch basketball with the US President, but won't take a lesson in economics from him; the Liberal Democrats, of course, long ago succumbed to deficit hysteria. We are where we are. Austerity rules, OK?

However, as Alexander discovered in Gordium, there is another way to untie the knot. Whisper it quietly, but fiscal stimulus doesn't always require deficit spending. Economists refer to the concept of a "balanced budget multiplier", by which national income is automatically increased, pound for pound, with any boost in government spending that is matched by a tax rise, especially with interest rates – as they are now – near zero and no risk of the public sector "crowding out" the private sector.

It's an ingenious concept – but there's nothing new about it. Paul Samuelson, who wrote the biggest-selling economics textbook of all time, was teaching his students about the efficacy of balanced-budget stimuli in the early 1940s. "It's a pretty solid argument," Simon Wren-Lewis, professor of economics at Oxford University and a former adviser to the Bank of England, tells me. "In fact, it's one of the most robust arguments in macroeconomics." Wren-Lewis is one of a handful of economists who, in recent months, have been urging the Government to invest in a whole host of major new infrastructure programmes, all paid for by additional taxes.

Coalition ministers don't have to go rummaging around the back of the sofa to find some spare change for such a "balanced" stimulus. Britain, remember, is a relatively low-taxed nation compared with our Continental cousins. There are plenty of new and popular taxes that could be used to fund a short-term stimulus: from a mansion tax to a tycoon tax; from a bankers' bonus tax to a financial transactions tax. Then there's the wide range of existing taxes that could be increased: a single penny on employee national insurance contributions, for example, would raise around £4.5bn; so too would a single penny on the basic rate of income tax. Wasn't the latter once official Liberal Democrat policy?

In February, the Social Market Foundation (SMF) published its own "balanced budget" plan to boost growth, by bringing forward the £15bn of tax increases now pencilled in for after 2015 and using the money to fund new "pro-growth" infrastructure spending over the next four years. "It's time to move beyond the sterile debate" of deficit reduction versus fiscal stimulus, wrote the SMF's director Iain Mulheirn in the Financial Times. By balancing extra spending with extra taxes, he argued, the SMF plan would get the Government off the hook of having to announce a fiscal plan B and provide it with "a potent growth strategy within existing borrowing plans".

It's a no-brainer. Yet, a month later, and less than a week away from the Budget, Mulheirn tells me that there has been "complete radio silence" from Coalition ministers. The Tories, in particular, he says, just aren't interested in his proposal.

Why not? After all, it neutralises the main objection to a further round of stimulus spending: that such a move would increase borrowing and panic the markets. A "balanced budget stimulus", by definition, won't do either – so why the continued resistance from ministers? "You begin to appreciate what their real agenda is," says Wren-Lewis. "They just don't want any new spending." For this Conservative-led Coalition, shrinking the state seems to take priority over getting growth. Deficit reduction has become rhetorical cover for a nakedly ideological assault on "Big Government" – no matter what the cost to the nation or the economy in terms of lost output and jobs.

The time has come for a grand bargain between the deficit doves and hawks, based on a recognition of the fact that we don't need to go deeper into debt to stimulate growth. The balanced budget stimulus presents the Chancellor with an opportunity, in next week's Budget, to cut through the Gordian Knot that's been strangling our economy. Political dogma is all that stands in his way.

Mehdi Hasan is senior editor (politics) at the New Statesman and the author of "The Debt Delusion"

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Recruitment Genius: Bookkeeper / Office Co-ordinator

£9 per hour: Recruitment Genius: This role is based within a small family run ...

Recruitment Genius: Designer - Print & Digital

£28000 - £32000 per annum: Recruitment Genius: This Design and marketing agenc...

Recruitment Genius: Quantity Surveyor

£46000 per annum: Recruitment Genius: This property investment firm are lookin...

Recruitment Genius: Telesales / Telemarketing Executive - OTE £30k / £35k plus

£18000 - £35000 per annum: Recruitment Genius: This company specialises provid...

Day In a Page

Read Next
Yarl's Wood in Bedfordshire, Britain’s largest Immigration Removal Centre  

Thanks to Channel 4 we now see just how appallingly Yarl’s Wood detention centre shames Britain

Yasmin Alibhai Brown
 

If I were Prime Minister: I’d ensure ministers took mental health in the armed forces as seriously as they take physical wounds

James Jones
The difference between America and Israel? There isn’t one

The difference between America and Israel? There isn’t one

Netanyahu knows he can get away with anything in America, says Robert Fisk
Families clubbing together to build their own affordable accommodation

Do It Yourself approach to securing a new house

Community land trusts marking a new trend for taking the initiative away from developers
Head of WWF UK: We didn’t send Cameron to the Arctic to see green ideas freeze

David Nussbaum: We didn’t send Cameron to the Arctic to see green ideas freeze

The head of WWF UK remains sanguine despite the Government’s failure to live up to its pledges on the environment
Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Author Kazuo Ishiguro on being inspired by shoot-outs and samurai

Set in a mythologised 5th-century Britain, ‘The Buried Giant’ is a strange beast
With money, corruption and drugs, this monk fears Buddhism in Thailand is a ‘poisoned fruit’

Money, corruption and drugs

The monk who fears Buddhism in Thailand is a ‘poisoned fruit’
America's first slavery museum established at Django Unchained plantation - 150 years after slavery outlawed

150 years after it was outlawed...

... America's first slavery museum is established in Louisiana
Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

Kelly Clarkson: How I snubbed Simon Cowell and become a Grammy-winning superstar

The first 'American Idol' winner on how she manages to remain her own woman – Jane Austen fascination and all
Tony Oursler on exploring our uneasy relationship with technology with his new show

You won't believe your eyes

Tony Oursler's new show explores our uneasy relationship with technology. He's one of a growing number of artists with that preoccupation
Ian Herbert: Peter Moores must go. He should never have been brought back to fail again

Moores must go. He should never have been brought back to fail again

The England coach leaves players to find solutions - which makes you wonder where he adds value, says Ian Herbert
War with Isis: Fears that the looming battle for Mosul will unleash 'a million refugees'

The battle for Mosul will unleash 'a million refugees'

Aid agencies prepare for vast exodus following planned Iraqi offensive against the Isis-held city, reports Patrick Cockburn
Yvette Cooper: We can't lose the election. There's too much on the line

Yvette Cooper: We can't lose the election. There's too much on the line

The shadow Home Secretary on fighting radical Islam, protecting children, and why anyone in Labour who's thinking beyond May must 'sort themselves out'
A bad week for the Greens: Leader Natalie Bennett's 'car crash' radio interview is followed by Brighton council's failure to set a budget due to infighting

It's not easy being Green

After a bad week in which its leader had a public meltdown and its only city council couldn't agree on a budget vote, what next for the alternative party? It's over to Caroline Lucas to find out
Gorillas nearly missed: BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter

Gorillas nearly missed

BBC producers didn't want to broadcast Sir David Attenborough's famed Rwandan encounter
Downton Abbey effect sees impoverished Italian nobles inspired to open their doors to paying guests for up to €650 a night

The Downton Abbey effect

Impoverished Italian nobles are opening their doors to paying guests, inspired by the TV drama
China's wild panda numbers have increased by 17% since 2003, new census reveals

China's wild panda numbers on the up

New census reveals 17% since 2003