Two profound departures from economic orthodoxy are now on offer in this most extraordinary of elections. Seldom before have the mantras of one era been ditched with such a wholesale sweep and suddenness.
It is not merely that “austerity” is dead. We are being promised an explosion in public spending and state activism not seen since the post-war government of Clement Attlee. Fiscal conservatism, hailed for the past decade as the only route to our salvation and recovery, is being buried under an epochal deluge of infrastructure shovels.
Conservative Chancellor Sajid Javid, until so recently the champion of fiscal constraint and firm limits on public spending expansion, has unveiled a £300 billion investment programme, tearing up old borrowing rules and reversing decades of Conservative policy. He aims to revamp roads, railways, schools and hospitals.
But the second departure from orthodoxy is the proposals of shadow chancellor John McDonnell, of such a different order and magnitude as to render simple comparison meaningless.
His vision is one of sweeping regime change: not just more spending but a fundamental rethinking of the role of finance, pubic capital and the state.
There are plans to set up a national transformation fund to overhaul the UK’s transport links and infrastructure. This includes a social transformation fund, which he says would now get an extra £100bn, providing a £150bn pot to be spent over the next five years. A further £250bn of investment will be spent across the country through a Green Transformation Fund.
He plans a £500bn spending blitz over ten years, half to be spent on infrastructure funded by government bonds and the other half from a National Investment Bank funded with £20bn of government money, backed by Treasury guarantees.
Here the Scottish Government is already ahead of the pack, having unveiled plans for a £2bn Scottish National Investment Bank, with a mooted staff of 130 and a war chest of £2bn set to swing into action next year.
As for current spending, barely a day now passes without huge extra commitments for the NHS, social care, school building, education, housing, the police and help for the low paid.
Such commitments should surely be greeted with unalloyed joy by voters. The years of constraint and scrimping and cutback are banished. And our future is to be turbo-charged by programmes that dwarf previous electoral pledges of previous decades. Economic growth, business investment and productivity performance will be transformed.
But the reaction to this startling sea-change has been mixed. Many voters struggle to be convinced that this dramatic turnabout about to be unleashed is really credible. After years being told that austerity was the only path to recovery, dare they believe it?
And among economists and pundits, there are deep divisions as to the execution and efficacy of this spending bonanza. One group is convinced that the ditching of previous Treasury limits cannot come soon enough. Net public investment was slashed from 3.4 per cent of GDP in 2009 to 1.7 per cent in 2014 – based, in the words of one critic, “on primitive pre-Keynesian theories of debt”.
And why hold back now when the budget deficit has fallen below three per cent of GDP and borrowing costs are at rock bottom?
For example, IMF economist Oliver Blanchard argues that government debt “may have no fiscal cost” if growth rates outstrip interest rates as they do today. Put another way, the risk of public debt in the era of ultra-low borrowing costs is benign enough that governments can be more relaxed. The UK government can borrow today at 1.16 per cent – less than the current rate of inflation. And the OECD says investment worth 0.5 per cent of GDP on well-targeted projects would lift UK output by 0.6 per cent – and lower the ratio of debt to GDP.
Others warn of the risk of an inflation hike and a tax and debt explosion. Markets will take fright and business investment will not be as forthcoming as the optimists believe.
For example, Mark Littlewood, director general of the Institute of Economic Affairs, retorts that the Blanchard theory is OK if (a) you are optimistic, (b) the optimism turns out to be right, and (c) it is right for a very long period of time.
Labour points to examples of other countries where high levels of public spending and borrowing have proved conducive to growth. But even allowing for the party’s long-standing bias towards Keynesian economics, its election programme marks a remarkable step-change. McDonnell says Labour would introduce new fiscal rules, meaning “borrowing for investment” would not be included in borrowing targets, adding that this would mean public assets created by infrastructure spending would be “recognised both as a cost and as a benefit”.
Here we come to a strange paradox in his tone and presentation. He can seem to copy Robert Louis Stevenson’s Strange Case Of Dr Jekyll And Mr Hyde. There is the calm, soothing tea-and-biscuits wooing of business and financial leaders, presenting his proposals as reasonable and investment-friendly. And then there is the ideologue, committed not just to fiscal reflation but to an economic and social transformation: Attlee with a Venezuelan accent.
A minority Labour administration supported by “confidence and supply” deals with the SNP, Liberal Democrats and anti-Brexit figures cannot be ruled out. But it could be that such support might act as a constraint on the size and timing of the party’s fiscal ambitions. The other parties may have other priorities and seek to maintain market confidence in the face of costly Labour plans for the nationalisation of key utilities such as rail, water and energy.
And there are other constraints, too. Giant infrastructure projects are by no means universally popular, as the controversy over the proposed HS2 is proving. And our planning process, north and south of the border, may see lengthy and frustrating delays to projects such as hospital building. These may be widely supported in principle but hit unanticipated logistical problems and soaring cost overruns can strike.
Voters may well be cheered by the death of austerity. But it does not mean they will not have the most searching questions to ask of the ability of the parties to deliver.