In 2008, you said that a Keynesian stimulus would be a "cruise missile aimed at the heart of recovery". Three years on, may I suggest that austerity is a "cruise missile aimed at the heart of recovery"? If everyone is being austere at the same time - householders paying off their credit-card debt as the Prime Minister wants, businesses deleveraging, the government cutting its spending - the economy is bound to shrink. It is one thing to be austere when the need is to reduce overheating. It's quite a different thing when the economy is freezing and the need is to restart growth. The question is: where is growth going to come from?
I accept that, for reasons of politics and confidence, you cannot now abandon your commitment to your deficit-reduction programme. What we need, though, is to revive the conceptual distinction between current and capital spending. You should aim to achieve a balance of revenues and expenditure on current account, but augment capital expenditure. Banks cannot be forced to lend, or households and business forced to borrow. Therefore, the government has to provide the stimulus for new capital investment on a scale sufficient to overcome the cumulative forces of austerity. But, for the sake of the public accounts, and also to give confidence, it would be far better that the programme of public investment be entrusted to a separate, independent institution.
You already have an instrument to hand: the Green Bank. But it is to be given only £3bn and prevented from borrowing. A bank that can't borrow is no bank at all. We need a proper national investment bank, with more capital and the ability to raise private money.
My proposal is very simple. You should use part of the proceeds of the sale of government shares in bailed-out banks to increase the capitalisation of the national investment bank. A limited fiscal commitment - say, £10bn in subscribed capital, with contributions drawn down over the next four years - would allow the new bank to finance enough spending to more than offset the £87bn of reductions in public investment planned before 2015. In this way, it could bolster confidence and increase demand without adding to the deficit. To those who say there are no "shovel-ready" schemes, I would reply that the commitment to a large programme of capital investment, of itself, would give confidence ahead of the start of the investment.
The difference between the total and the government contribution would be funded from the bond markets. This is the magic of leverage, of course: the magic that got such a black name as a cause of the crisis. But a national investment bank is an opportunity to turn that magic to a constructive end.
In fact, an investment bank would kill three birds with one stone. First, through its funding programme, it would create a new class of bonds - long-term, but with a yield pick-up over gilts, reflecting the modest credit risk of the bank - which could include features that fit the needs of the UK pensions industry, the need for renewing infrastructure and the demands for energy efficiency. Second, by lending for the long term, it would help long-term growth. And finally, by ramping up its operations now - when the corporate recovery is being hamstrung by shrinking bank lending and fiscal austerity - it can offer a boost to aggregate demand when it is needed most.
Robert Skidelsky is emeritus professor of political economy at the University of Warwick. He is a crossbench peer and a biographer of John Maynard Keynes