Labour and Tories race to ramp up spending despite borrowing risks

Labour has announced £150bn of additional infrastructure spending as part of a range of plans that signal a large rise in public borrowing, amid bids from both parties to ramp up spending.

It comes as the independent Office for Budget Responsibility scrapped a plan to publish official figures for government borrowing under the Conservatives, which were expected to show an increase in the budget deficit – the difference between the level of government spending and income from taxes.

Chancellor Sajid Javid warned Labour’s plans would “make the country sick and unhealthy again”, as both he and the shadow chancellor, John McDonnell, shift the election debate to the economy. Javid has also announced policiesthat would result in higher borrowing.

What is the Labour transformation fund?

John McDonnell is planning a £150bn “social transformation fund” over five years. It comes on top of a £250bn “green transformation fund” to be spent over 10 years. Worth a combined £400bn, the funds will be controlled from a new Treasury office based in the north of England.

The social fund would be for schools, hospitals, care homes and council houses, while the longer-term funds would be used for infrastructure spending on transport and energy, as part of the party’s plans for a “green industrial revolution”. The money would be used to retrofit homes across the country, fund offshore wind projects and a “Crossrail for the north”.

Capital spending has been reduced by the government in recent years, following the financial crisis. The OECD recommends that advanced nations spend around 3.5% of GDP a year on infrastructure. Labour’s proposals would take current government investment spending from around £47bn, or around 2% of GDP, to at least £100bn per year, or around 4% of GDP.

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How would Labour pay for it?

The new funds would be entirely paid for by additional borrowing.

The government’s budget deficit has fallen steadily over the past decade from a peak of £158bn in 2010 after the financial crisis to about £23bn in the year to March 2019.

Borrowing is expected to rise in future as existing spending commitments already put in place by the Conservatives kick in. GDP growth has also slowed, impacting tax receipts.

Is there any difference between Labour and Tories on borrowing?

Both Labour and the Tories have signalled higher spending, without sufficient tax rises or spending cuts elsewhere to keep the deficit falling in future years. Whatever impact Brexit has on the economy would also influence government finances.

Both parties are yet to publish manifestos, making it difficult for analysts to say exactly which party will most increase spending and borrowing. Carys Roberts, chief economist at the IPPR, a leftwing thinktank, said that the decision facing voters was about which party to trust to raise spending and borrowing.

She said: “The Tories are calling their plans the end of austerity, while also calling Labour fiscally irresponsible. They’re treading a fine line there. Both are increasing their borrowing by quite some margin. From Labour it’s more about borrowing for investment, with the Conservatives its more on current spending and tax cuts.”

What are the pros and cons of higher borrowing?

Expanding investment to boost the economy is nothing new, particularly during times of economic turbulence. President Franklin Roosevelt used the New Deal in the 1930s, massively expanding US spending on public works to pull the American economy out of the great depression.

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One danger is that the government could face higher interest payments on its debt. Britain currently pays about £40bn a year to service a debt pile of about £1.8tn, or 84% of GDP. Adding to that with higher annual deficits could make the country a more risky prospect for international investors, driving up borrowing costs.

However, the cost of borrowing has fallen since the financial crisis to historic lows, as central banks cut interest rates around the world. Economists do not expect the trend to be dramatically reversed any time soon.

Money spent on infrastructure should boost the performance of the economy in future, potentially making Labour’s plans a sensible investment.

However, economists warn it could be unwise to spend as much as £150bn in as little as five years, given there are unlikely to be enough shovel-ready projects available – raising the risk that the funds might be spent wastefully.


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