Nick Clegg has sparked a flurry of excitement with his admission in an interview for The House magazine that the Coalition cut capital spending ‘too far, too fast’ to coin a phrase. Here’s what he said to Paul Waugh and Sam Macrory:
“If I’m going to be sort of self-critical, there was this reduction in capital spending when we came into the Coalition Government. I think we comforted ourselves at the time that it was actually no more than what [former Chancellor] Alistair Darling spelt out anyway, so in a sense everybody was predicting a significant drop off in capital investment. But I think we’ve all realised that you actually need, in order to foster a recovery, to try and mobilise as much public and private capital into infrastructure as possible. … Wherever we can we’ve got to mobilise more capital investment … The economic evidence is overwhelming. It helps create jobs now – people go onto construction sites. It raises the productive capacity of the economy in the longer run.”
Five points are worth making here:
1) Nick’s right.
I agree with Nick’ self-criticism of the Coalition. But it’s important to note two things. First, there’s a difference between capital spending (fixed-term spending on infrastructure, such as railways) and revenue spending (ongoing financial commitments, like pensions). Nick’s admission relates specifically to the former. Indeed, the vast majority of the Coalition’s deficit reduction has come from cutting investment, rather than from slashing current spending — as this graph clearly shows.
2) He’s also right Labour would have done the same.
Don’t take my word for it. Here’s Jonathan Portes, director of the National Institute of Economic and Social Research (NIESR), and a trenchant critic of the Coalition’s deficit reduction strategy:
Of course, not all this is the government’s fault. The previous government also planned to slash investment spending.
3) But why?
Why did politicians of all stripes go down this route? Two reasons, I think:
First, it’s the ‘easy’ option. Cutting capital spending doesn’t provoke public anger in the same way cutting front-line services does: people don’t miss what they haven’t got. None of the parties identified anything near the scale of revenue cuts needed at the last election (as I reported here in April 2010):
No party has set out how it will tackle the deficit in full: the Lib Dems have gone furthest in being open and honest with voters, identifying over 25% of measures needed, ahead of either the Tories (17%) or Labour (13%).
4) Economists’ views have changed on this
A crucial component of deciding whether cutting capital expenditure could be justified is the ‘fiscal multiplier’: ie, how much the economy shrinks as a result of cutting the deficit.
The Coalition banked on the multiplier being neutral-to-low. They found some comfort in the views of most mainstream economists, including the OBR, Bank of England and NIESR, which reckoned the multiplier was approximately 0.5 which meant the impact of the Coalition’s deficit reduction would be “significant, but not disastrous” (to quote Jonathan Portes).
But then just last October the IMF revised its view. A lot. It now estimated the ‘fiscal multiplier’ to lie in the range 0.9 to 1.7. Portes again:
The IMF have now definitively sided with those who think that tightening fiscal policy quickly and sharply had a very large and negative impact.
5) You have to spend the money well
Quite simply, investment is the easiest tap to turn off if you’re a politician looking to reduce the flow of spending in a hurry. All parties looked too eagerly for a quick fix to the deficit believing the economy was on the mend anyway. Moreover, both Tories and the Lib Dems in particular took the view — not unreasonably in some cases, including the flawed Building Schools for the Future programme — that too much was being spent on prestige capital projects for too little gain.