In the aftermath of Britain’s ejection from the ERM, Norman Lamont, then Chancellor of the Exchequer, famously said “je ne regrette rien” – an off-the-cuff remark he surely came to regret when, not long after, he was sacked by John Major.
When, eventually, George Osborne publishes his memoirs it will be interesting to find out what the current Chancellor comes to regret. With the benefit of hindsight and free from the absurd political game that forbids its players from admitting the slightest self-doubt, what will he most wish he had done differently?
Time will tell, but his biggest regret may turn out to be not making a stronger distinction between current spending and capital spending. While there is no question that the former must be reduced, cutting the latter can be a false economy.
Writing for the Fiscal Times, the US economist, Mark Thoma, provides a good explanation of why capital spending on infrastructure, while increasing the deficit in the short-term, reduces debt in the long-term:
Similarly, a nation can build up a backlog of repairs if it fails to undertake necessary maintenance of, and improvements to, its essential infrastructure. This ‘infrastructure debt’ may not show up on our public accounts, but it does eventually undermine confidence and growth.
As the old proverb has it, one should ‘mend the roof while the sun shines’; but, failing that, a deep economic crisis isn't a bad time to spend money on infrastructure:
Some economists would add that extra government spending in a recession pays for itself in a downturn by replacing lost demand, thus getting the economy growing again. However, even if one isn’t a signed-up member of the neo-Keynesian magic money brigade, the logic of upgrading infrastructure at a bargain price should be unanswerable.
George Osborne can, at the very least, console himself with this thought: It was his decision to cut infrastructure spending by less than Labour’s plans for this Parliament. So even at its worst, Government policy is still better than the alternative.