I believe, quite emphatically, in the importance of a fiscal stimulus for our economy at this point of time. Counter cyclical spending is an essential component of economic strategy for any government facing recession.
There are two ways of delivering a fiscal stimulus. One is to cut taxes. The other is to increase government spending. Both are undertaken for the same reason. In a recession growth is negative. In other words, there is a downward spiral within the economy. At present we do not know how to manage this situation and maintain the perception of well-being that people expect and as a result governments want to return to the much more comfortable position of growth which keeps electorates happy at the first possible opportunity.
The fiscal stimulus is designed as a short-term injection of funding which reverses the downward trend of the economy. Of course, it cannot do this by itself. It is obvious that governments cannot spend enough to completely buck markets, but if a fiscal stimulus is appropriately designed it creates what is called a multiplier effect. In other words, those who benefit from the immediate spending by the government then spend some of that benefit, so giving a secondary effect. Those who enjoy the secondary effect then of course spend some of that benefit and so the process continues. This is exactly why governments do not necessarily have to recoup the cost of the fiscal stimulus pound for pound out of future taxation revenue, which might then constrain growth. A well-designed stimulus will pay for itself as the economy recovers faster than it would otherwise do.
But, and this is the key point, the fiscal stimulus has to be designed to achieve the maximum multiplier effect if this is to be achieved. There is a fundamental difference between the two options of tax cuts or investment. Tax cuts produce short-term fixes in promoting consumption expenditure. They may also allow some people to service debt which might otherwise go bad. But vitally, because so much consumption expenditure in the UK simply stimulates imports, to provide tax cuts that have this effect creates a very poor multiplier effect within the UK economy: much of the benefit is actually exported and gives rise to a multiplier effect elsewhere.
This puts tax cuts in stark contrast to a fiscal stimulus through investment. Investment creates jobs, but obviously the intention is to create a job in the UK as that has a maximum multiplier effect for each pound of government spending. The government says that this is not possible in the short term because all investment projects require long-term approval. That is because they think that investment projects are things like the Olympics, building a new airport, or even bringing forward the schools building programme (PFI funded as it is, and therefore with massive long-term problems inherent in it anyway).
That however is untrue. There is a massive backlog of works that need to be undertaken which can be put into progress almost immediately, and which would have exactly the right effect for fiscal stimulus purposes in the short term. It so happens they would also have enormous short-term benefit for the UK population, and for our long-term carbon efficiency. Take for example the insulation of vast numbers of UK properties which are present completely thermally inefficient. Take for example fitting double glazing to large numbers of properties which do not have it. This is work for which people can be trained to do in a very short period of time. That tackles an unemployment issue. We know that there is going to be unemployment in the building sector of enormous degree. People could be redeployed on this activity. We know that we need this form of thermal efficiency. We know people are living in substandard properties because this activity has not been done too many years.
The government now needs to get on with this sort of programme. We do not need a third runway or new roads to achieve a fiscal stimulus. We need cavity wall insulation and loft insulation at 64 Kings Avenue, somewhere near you. And 64 Kings Avenue needs that much more than it needs a new video game console, made in China and unlikely to be discovered by next March (at the latest).
This is the choice we have available to us. If the government goes the tax cuts it will make the wrong choice. The right choice is the green choice on this occasion, and it so happens that can be delivered, fast.