Why Increasing Government Spending Won't Work

A number of politicians and journalists are increasingly putting forward the case for increasing Government spending rather than cutting it. I thought I'd outline a few points on the issue. I will throw forth a few bullet points for consideration here because this is far too large a subject matter to effectively deal with succinctly...

• It is precisely because Cameron/Clegg have managed to sell their austerity programs, that the UK is able to borrow money at low levels. If they had indulged in more spending than, in my humble opinion, the market would have punished the UK. Moreover, the UK has a system of 'elected dictatorship' which means that the market is not pricing in the likelihood of Ed Balls getting anywhere near the public finances

• Corporate cash balances have helped hold back market rates because traditionally in recoveries (and I accept this one is anaemic) they push up yields as they search for capital

• Promulgating Government investment requires you to be unencumbered with any notions of inherent efficacy differences between public and private sector investment. I am not free of such prejudices; in fact, I think less Government spending is usually a good thing. Who is doing the investment is arguably more important than the absolute level

• Throughout history, whenever Governments have cut deficits (Sweden, Canada et al) it has always been through cutting spending rather than raising revenue. This doesn't tally well with raising expenditure.

• In my opinion, the expansion of Commercial & Industrial loans and business investment usually follow a cyclical upturn in consumer expenditures. I think what is different, this time around, is that the banking sector (the issuers of capital) has faced significant challenges this year.

• It was a mistake not to allow the forces of creative destruction to eradicate the leadership of the banks and destroy their perverse incentive structure. The management are clearly not fit for purpose, are only interested in siphoning off the assets of the banks at the expense of the shareholders, and have thus far demonstrated no ability whatsoever to generate shareholder value when the taxpayer isn't supporting the direction of their underlying assets by buying them up 

• Japan has undergone an experiment in stimulating expenditure and supporting 'Zombie industries' with the aim of sustaining employment and growth and, it has failed miserably. Governments simply aren't the best authorities when it comes to productive investment.

• The US underwent a significant expansion of public sector spending without raising the revenues to pay for it. This is why their deficit is so large. Noticeably, it was the Republican administrations of Reagan and George 'W' Bush than engaged in expanding spending whilst cutting taxes.

So frankly, the idea that the UK or any other Government should actually be increasing public expenditures is folly of the highest order. The key is to cut spending yet seek ways in which to encourage the private sector to invest, by rolling back the frontiers of the state. In the UK this might involve things like relaxing planning restrictions on new house build in the South East or encouraging research into genetically modified foods. There are many ways to promote growth, but the worst of which, is wanton Government expenditures. It's been tried. It doesn't work.

Let's Hear it for Nick Clegg

I’m serious. The much maligned Nick Clegg, leader of the Liberal Democratic Party- the smaller coalition partner in the UK Government- is actually deserving of praise for his role in supporting the Government sell its austerity efforts to a fretful bond market. Well, at least, in the view of this blogger!

Government Austerity Plans and Bond Markets

There are two issues with Governments being able to convince investors that they have put together a credible plan to deal with their deficits. The first is the plan itself, and the second is the credibility of their ability and willingness to carry out the plan. For a British observer, the latter point can be seen as a display of the lack of fortitude and consistency that categorises Continental European style coalition politics.  All it takes is the opposition of a few extremists within a coalition Government and significant resistance can be generated. 

Greece has had to deal with its main opposition leader (Antonis Samaras) opposing austerity programs. Angela Merkel is constantly engaging with mounting opposition to ‘bailing’ out the rest of Europe. Berlusconi appears to be at loggerheads with Economy Minister Giulio Tremonti (the most credible austerity hardliner in Italy) and the opposition parties are calling for his head. The list goes on and on in Continental Europe, however, the British system is seen as being a kind of ‘elected dictatorship’ whereby the Government can-more or less- get legislation through parliament with ease. Or can it?

Ed Balls the Most Dangerous Man in Britain?

The fact is that, the UK Government is a Conservative/Liberal Democrat coalition. The election did not deliver any one party as a decisive victor. Moreover, for the benefit of non British readers, the Liberal Democratic party has- in recent years- been seen as even more willing to ‘tax and spend’ then the former Labour Government. In addition, the shadow chancellor in the UK is Ed Balls, a man widely seen as the architect behind Labour’s failed economic policies which lead to the UK’s public finances looking as weak as, say Italy’s.

 If we put these ingredients together, it’s not hard to envisage a nightmare scenario where a failing coalition Government causes the market to start pricing in the return of Ed Balls. Frankly, I think it is a disgrace that Balls has been appointed the shadow chancellor and, I regard him as the most dangerous man in Britain. I suspect that the slightest notion of Ed Balls in Dowing Streeet would cause a significant hike in market yields for UK debt. You could call this event a ‘Balls Up’.

Let’s Hear it For Nick Clegg

So what of Nick Clegg? Frankly, I think Clegg has behaved admirably. He is a sitting duck for criticism from his own party, yet he has supported Cameron in his efforts at selling the austerity program. Unlike so many others, he has rarely played Party political games which act as a detriment to his country. I’m not so naïve as to not understand that towing the Cameron line is the best way for the Liberal Democrats to exert some influence (at the cost of devaluing some of the principles of some in his Party) but in his support for Cameron, he has displayed a willingness to do the right thing for his country even at his own expense. A quality which Berlusconi, Samaras et al would do well to emulate.