Even in today’s straitened times, £300m is not a large sum when set against total public spending some 2,400 times larger (£720bn) and an overall government deficit some 390 times larger (£118bn). And yet the discovery that public-sector borrowing stood at £118.8bn in the year to the end of March – about £300m higher than the £118.5bn recorded for 2011-12, or a quarter of 1 per cent – has raised entirely legitimate questions about whether the Government’s strategy to repair the public finances and to promote growth is actually working.
By the benchmarks the Treasury set way back in 2010, and since, the economy and the public finances have resolutely underachieved government targets. Partly that is because no one expected the recession to last this long because, in turn, no one expected the eurozone to implode; nor did anyone anticipate quite how long it would take for the banking system to return to health and repair the calamitous damage suffered in the crisis of 2008-09.
The recent travails of the Co-Op Bank and Cyprus remind us that neither the banks’ nor the eurozone’s troubles are over. Faltering growth in the so-called Brics and, until lately, a baleful picture in Japan complete the litany of factors conspiring against the UK. A medium-sized, open trading economy with Europe on its doorstep and a large financial sector couldn’t be expected to thrive in such a climate. Hence tax receipts, despite well-publicised and deeply unpopular hikes, are too low to support spending. Trends towards protectionism and fragile investor confidence have added to the gloom. Indeed, the surprise might be that the UK is doing even as well as it is now, given all of that. Only America has offered cause for optimism, but as Ben Bernanke thinks it might be time to ease off the monetary pedal, even its sturdy performance may start to crumble.
The other side of this story, though, is home-grown policy errors. No one saw that the Bank of England’s radical programme of quantitative easing – pumping money into the economy – would have had such a muted impact. Clearly, the policy reached the point of diminishing returns some time ago, and the battery of lending schemes for the housing market and businesses has had, at best, mixed results. Insofar as there has existed, since 2010, a tacit compact between the Treasury and the Bank – whereby the Bank supported the economy by monetary means while the Treasury got on with the depressing (in every sense) task of cutting public spending and raising taxes – it has not worked as well as it might.
Higher borrowing, lower taxes and higher public spending, then, might have been the right way to support an economy that was not responding to the regime of ultra-low interest rates. We know that now; it could not have been known in advance, but as the evidence grows that such support is needed, the case for adjusting – not abandoning – Plan A grows. This is especially true when there seems little sign that it would spook markets and prompt a Greek-style panic sell-off in sterling and gilts.
We lost our AAA rating months ago, and it seems the world shrugged and moved on. There may be an appetite across the political spectrum and among institutional investors and markets more broadly for a much more ambitious agenda of infrastructure spending. High-profile projects such as Crossrail and HS2 can be joined by other smaller ones, across the country, that would lead to a long-term rise in the trend rate of growth in the UK – the key to raising tax revenues, restoring the public finances, spreading prosperity from the South-east and boosting jobs. If no one would much object, why doesn’t the Chancellor do it?