The Chancellor’s announcement today with his Pre-Budget Report for 2008 provides the bold stimulus the economy needs to help the country through the global financial crisis. Although more than £500 billion will be added to the National Debt by 2015, there is no doubt in my mind that if these measures were not taken the longer term costs to the economy and to society would be far greater.
However, I am a pretty much an unreconstructed Keynsian and I do wonder whether the balance is quite right. Ideally, in my view there should have been a greater emphasis on bringing forward public investment. What has been announced is hugely welcome and should produce a direct impact on employment. There is no question that there will be substantial public benefits flowing from the £800 million going to school building improvements (2,000 secondary school classrooms improved, new kitchens for 300 primary schools etc) and the £775 million going to housing improvements (much of it to make homes more energy efficient). But was there only scope for £3 billion-worth of such investments without overheating the construction industry? There is no doubt that much of our public infrastructure would benefit from more investment and this would have been as good an opportunity as may arise for this to happen.
By contrast the reduction in VAT till the Christmas after next will give £12.5 billion back to consumers. Now that, of course, will help those on low incomes and those newly unemployed. However, is there not a risk that much of the effect will be to stimulate the Chinese economy as consumers go out and by electronic and other goods imported from China. Now this may be a good thing for the world economy, but I am not sure whether it wouldn’t have been better to keep more of the stimulus within the UK.