The news that the coalition is set to announce £15bn of infrastructure investment in next month's Spending Review is being portrayed by some as a significant shift that blunts Labour's economic critique. The FT's report claims that the move "could overshadow Labour’s attempts to convince the public it is the only party arguing for a big boost to capital spending. But for several reasons, it's less impressive than it sounds.
First, this isn't new money. In the Budget earlier this year, Osborne announced that the government (assuming he's still Chancellor) would spend £3bn a year on infrastructure from 2015-16, amounting to £15bn over the rest of the decade. Second, the fact that the investment will be spread over five years, rather than one, and will be entirely funded through greater cuts to current spending will significantly reduce any increase in growth.
Though Osborne will claim otherwise, alternatives were on offer. Vince Cable called for him to take advantage of Britain's historically low bond yields and borrow £14bn (1 per cent of GDP) to invest in housebuilding. As he wrote in his New Statesman essay in March:
One obvious question is why capital investment cannot now be greatly expanded. Pessimists say that the central government is incapable of mobilising capital investment quickly. But that is absurd: only five years ago the government was managing to build infrastructure, schools and hospitals at a level £20bn higher than last year. Businesses are forward-thinking and react to a future pipe - line of activity, regardless of how “shovel ready” it may be: we have seen that in energy investment, where the major firms need certainty over decades.
The Economist recommended an additional £28bn of infrastructure investment, with at least half funded through higher borrowing. Bloomberg argued for a minimum stimulus of $21bn, again largely deficit-financed. But Osborne persisting in the delusion that "you can't borrow more to borrow less" (in fact, as any Keynesian knows, you can) has once again chosen austerity over growth.
Labour remains the only one of the three main parties calling for a genuine stimulus. But if it wants to maintain that position, it will need to make a sustained case for borrowing for growth (as Ed Miliband entirely failed to do in his infamous World At One interview). One key test of the speech Ed Balls will give on the economy on Monday will be whether he finally does so. Too often since 2010, Labour has appeared to be running scared of its own policy.