Whisper it, but Osborne has embraced Keynesianism

The Chancellor has accepted the need for the state to underwrite investment.

The announcement by George Osborne that the government will underwrite £50bn of infrastructure investment is a belated admission that, in times of recession, the state must intervene to stimulate growth. The delusion that the coalition's spending cuts would increase consumer confidence and produce a self-sustaining private-sector-led recovery has been abandoned after Osborne's "expansionary fiscal contraction" turned out to be, well, contractionary. Whisper it, but Keynesianism is back. 

Since the decision to guarantee loans will not, in theory at least, require the government to spend a penny more, Osborne will insist that this is not "plan B" or anything like it. As his sidekick, Danny Alexander, puts it, "This is not a direct call on the taxpayer. That would only happen if something went wrong with a project." And after the private sector's sterling performance over the last month, why should we doubt him?

But even if we assume that the taxpayer won't be forced to pick up the tab for any of the projects (the FT cites "the Thames tunnel, the Mersey Gateway toll bridge and the A14 road widening in Cambridge" as examples of those that might benefit), this remains a significant U-turn by Osborne. As the excellent Jonathan Portes points out on his blog, from an economic perspective, the difference between the government "borrowing from the private sector to finance investment spending, and the government guaranteeing the borrrowing of another entity" is is largely irrelevant. The Chancellor has accepted the need for counter-cyclical spending to boost aggregate demand - the essence of Keynesianism.

Now Osborne has performed a small U-turn he will find it harder to avoid a bigger one. The belief that, in times of recession, the state can and should stimulate growth through temporary tax cuts and infrastructure spending is based on decades of economic research. Once you accept this, it is hard to be a little heretical.

Since Osborne is so fond of boasting of the UK's "safe haven" status, the least he could do is take advantage of it. He should use the country's historically low bond yields to borrow to stimulate growth through higher infrastructure spending (the most effective stimulus, according to the Office for Budget Responsibility) and tax cuts.  As the Nobel Prize-winning economist Christopher Pissarides argued in our "Plan B" special issue last October, "a small rise in gilt interest rates is a small price to pay for more jobs".

The Chancellor has finally accepted that there is an alternative to permanent stagnation (or worse). Now he needs the policies to match.

Chancellor George Osborne plans to guarantee up to £40bn of "nearly ready" infrastructure projects. Photograph: Getty Images.

George Eaton is political editor of the New Statesman.

Photo: Getty
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Theresa May is paying the price for mismanaging Boris Johnson

The Foreign Secretary's bruised ego may end up destroying Theresa May. 

And to think that Theresa May scheduled her big speech for this Friday to make sure that Conservative party conference wouldn’t be dominated by the matter of Brexit. Now, thanks to Boris Johnson, it won’t just be her conference, but Labour’s, which is overshadowed by Brexit in general and Tory in-fighting in particular. (One imagines that the Labour leadership will find a way to cope somehow.)

May is paying the price for mismanaging Johnson during her period of political hegemony after she became leader. After he was betrayed by Michael Gove and lacking any particular faction in the parliamentary party, she brought him back from the brink of political death by making him Foreign Secretary, but also used her strength and his weakness to shrink his empire.

The Foreign Office had its responsibility for negotiating Brexit hived off to the newly-created Department for Exiting the European Union (Dexeu) and for navigating post-Brexit trade deals to the Department of International Trade. Johnson was given control of one of the great offices of state, but with no responsibility at all for the greatest foreign policy challenge since the Second World War.

Adding to his discomfort, the new Foreign Secretary was regularly the subject of jokes from the Prime Minister and cabinet colleagues. May likened him to a dog that had to be put down. Philip Hammond quipped about him during his joke-fuelled 2017 Budget. All of which gave Johnson’s allies the impression that Johnson-hunting was a licensed sport as far as Downing Street was concerned. He was then shut out of the election campaign and has continued to be a marginalised figure even as the disappointing election result forced May to involve the wider cabinet in policymaking.

His sense of exclusion from the discussions around May’s Florence speech only added to his sense of isolation. May forgot that if you aren’t going to kill, don’t wound: now, thanks to her lost majority, she can’t afford to put any of the Brexiteers out in the cold, and Johnson is once again where he wants to be: centre-stage. 

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to domestic and global politics.