I had to laugh when I saw a cartoon over the weekend showing a framed picture of Gordon Brown’s old flame, the mythical Prudence, being removed from the wall at HM Treasury and replaced with a portrait of Keynes. 

This would almost be a true depiction of events, were it not for the fact that prudence really has been a myth in government finances for most of the last decade.  Having observed their 1997 manifesto commitment to keep to Conservative spending levels, after 1999 the Government turned on the spending taps and let money gush out. 

To their credit, the Conservative leadership have been warning about excessive levels of public sector debt, as well as private debt, for a number of years now.  It is only with the impact of recession that the fuller implications of this become clear, as businesses go under and people have their houses repossessed.  It is clear to most households in the country that an appropriate reaction in these straitened times would be to cut out non-essential expenditure and pay back some of the debt.   This is a rational and understandable response.

By contrast, the Prime Minister’s pledge yesterday, as I understand it, is to borrow and borrow until government spending powers the country back into growth.  This is neither rational nor understandable.  It’s like saying “I can barely afford the monthly interest payments on my mortgage, so I’ll borrow even more from the Taxpayer Building Society and my grandchildren can pay the debt back in, oh, 50 years or so”. 

Starting from a point where public sector borrowing is at its highest for 62 years, it is clear that whoever wins the next election (and let us imagine for a moment that the Conservatives do win) is going to face a debt mountain which will severely constrain future flexibility for either government spending or affordable tax cuts, even after we are back into a period of growth.  The announcement expected from the Government later this week, widely trailed in this morning’s papers, that they are abolishing the vaunted “fiscal rules” (although of course it won’t be described as that) is a further sign of the panic at the heart of government and a knee-jerk return to the failed quasi-socialist policies of the past. 

This Keynesian (and who thought we would hear his name again?) policy was strongly criticised in a letter from some leading economists to the Sunday Telegraph.  As John Greenwood, the chief economist at Invesco Perpetual, so pithily put it: “Japan tried to spend its way out of recession in the early 1900s and the result was nothing except huge debt.  Private firms will not be able to improve their own balance sheet if the government gets to the table first”.

Increasing government spending and public sector borrowing is not the answer.  It will simply result in a burden for future generations and will not bring about the outcome which the Prime Minister and Chancellor seem to think it will.  A monetary policy response in the form of interest rate cuts, combined with a fiscal policy response of reducing tax rates, particularly on businesses which are the drivers of economic growth and prosperity (and not the government) as advocated in my last post, is surely the best response to the current challenge.