Spending solves nothing

It's not government spending that is going to get Britain out of the mess it's in, says Merryn Somerset Webb. It's reform.

I'm reading a magazine article written by Paul Bareau in the now long defunct Statist in 1967. He bemoans the state of the British economy, which at the time was suffering "pangs" of deflation. He notes that this deflation, "while modest", was nonetheless "violently resented", and then insists that "political pressure as well as economic good sense" suggests that "some time this year a series of measures of re-expansion will be called for".

The first harbingers of this had already appeared: there had been a cut in the bank rate (from 7% to 6.5%); new investment grants had been introduced and a "more lenient attitude" had been taken towards the banks. Sounds familiar, doesn't it? Today, thanks to the enthusiastic money printing of our central bank, we haven't quite got to mild deflation but we live in fear of it and violently resent any hint of recession as we do so; we are being lenient with our banks; we have most certainly cut what is now the base rate; and of course the political pressure for "re-expansion" is huge.

There's another similarity too. In 1967, Bareau wasn't actually calling for a huge rise in state spending. At a time when the budget deficit was around 4% of GDP, he was demanding "an extension to the public expenditure of the restraint which has hitherto been so largely reserved for the private sector of the economy".

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He didn't want re-expansion to mean more public spending. He wanted it to mean reform. "More teeth for anti-monopoly legislation", trade union reform, incentives for productivity improvements and an "all-out attack on the forces that undermine a truly competitive economy." He didn't get it.

And that, we can be almost sure, is exactly what is going to happen this time. Sensible people might call for supply-side reform and a focus on productive industries as the way out of our troubles, but the majority appear just to want more of the same. Last month the government floated its plan to borrow £40bn to invest in infrastructure (which, given the success of the Olympics, I can't see we really need). This week we hear that it is working on plans to stimulate housebuilding.

Never mind that it was the heavy focus on housing and construction (among a few other things) that got us into this mess in the first place; never mind that every single bit of news on the state of the public finances is grim; and never mind the fact that, as Fundsmith's Terry Smith puts it, "no one has ever managed to export a house", the answer for our politicians is pretty much always to spend more mostly on something to do with houses. For anyone of the opinion that you can't borrow and spend your way out of a debt crisis, it doesn't bode well.

PS. I have received so many emails on last week's editor's letter on the Olympics that I can't reply to them all. But you can find my responses on Twitter, or onmy blog.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.