Margo MacDonald: The key is when to stop spending

Published on Wednesday 29 April 2009 09:53

IN spite of everything that's happened, I still think that governments have to spend their countries out of recession. There's no other way yet known to save even one country from the situation our economy is now in but, since Alistair Darling's Budget, it's become obvious even to old liberal, Keynes-admiring lefties like me that the trick is in knowing when to stop spending.

If all the dreams of global co-operation, even EU co-operation, aired at the G20 summit when Gordon Brown led the world out of recession had come true, perhaps there would still be hope that higher taxes and public expenditure cuts could be avoided, or minimised in terms of overall economic performance.

But the success of the G20 summit depended on everyone, not just agreeing over dinner, but actually, using two per cent of their national GDP to stimulate their economies by boosting demand. Each country would have chosen the appropriate cocktail of tax cuts and public spending to achieve this. But the camera did lie when it captured a snapshot of economic togetherness amongst the world's leaders in their souvenir photograph.

As soon as their jets had touched down in Berlin, Rome etc, the leaders' cosmopolitan togetherness to save the world economy was replaced by the necessity of saving the jobs and lifestyle of the electorates that would re-elect, or reject, or take to the streets against them.

Also, G20 had concluded that from amongst their number, $1 trillion had to be made available to the IMF for debt bail-out to states, like Hungary, considered to be in deeper doo-doo than we are, for example. But neither has this come to pass. At the weekend we learned that only $500 million has been put into the kitty, and that there's little or no chance of this changing until the internal weighted voting of the IMF reflects the world's new balances of power.

The old post-war dominance of the world's international forums and economic organs such as the World Bank and the IMF by what used to be called "The West" has gone.

Emerging powers such as China, India and Brazil, whose potential economic development will rest on much bigger populations, want to play bigger parts in the global decision-making forums.

That new version of realpolitik, and hopefully, global single-mindedness, will not be achieved quickly or easily. Politicians and governments dependent on the democratic process, of necessity, will always have a short, handful of years in which to pursue and implement policies, and so will require real political bravery to adopt radical changes of direction, even if harsh reality dictates this.

So until the new world order is up, running and stable, countries like ours will have to do the best they can in their own circumstances, without relying on help from outside. Already, the UK's credit rating in the money markets is on a tightrope, so we cannot be sure the Government can borrow the 170 billion identified by Mr Darling in the Budget, and the even greater amount that will be needed if the Chancellor's growth target is not realised.

So the Westminster Government will have to cut its coat according to the cloth available here and now, and the Scottish Government will have to make do and mend its hand-me-down block grant. Alex Salmond and John Swinney have been trying to buoy up business morale by repeating the mantra that Scotland's doing better than the rest of the UK, but this weekend's re-balancing of hopes and expectations suggests that they should change tack and instigate re-evaluation of capital expenditure, both by St Andrew's House and local councils.

For example, in Edinburgh, there should be a cross-party, unbreachable defensive cordon around the plans and promised expenditure on affordable and council owned housing. Money may have to be moved around the education services, and new priorities established. Obviously, careless or excessive spending across the public services will require to be channelled into productive use, such as skills training.

And although all Lothians' councils will have to make hard spending choices, none will be more difficult than the decision that Edinburgh City Council may have to make on the trams. The rationale for the trams may have been destroyed by the economic chickens that have roosted since the weekend. It's going to take a lot longer to develop the Waterfront than would have made it sensible to push ahead with the line from Leith to the airport.

As part of the re-evaluation of capital projects, should we consider a new plan B . . . complete the work presently under way, but assess whether a line to the Royal Infirmary of Edinburgh and the life science park makes more economic sense than the line continuing to the airport?

I don't know the answer, but I'm going to ask the people who may.