The reaction of governments to the coronavirus is spawning a new form of “progressive” conventional wisdom (for example), which runs as follows: Western governments have always used financial constraints as an excuse for their inactivity. They claimed that levels of debt were too high, that ‘austerity’ was unavoidable, that borrowing was limited. The current crisis has disproved all of that.
The sight of governments abandoning their fiscal rules has raised hopes of a Green New Deal to lead economies out of the current recession. That is an aim worth fighting for, but the belief that governments can borrow as much as they want is misleading, and could rebound against the left and environmental campaigners.
In the short-term governments can borrow as much as domestic or foreign lenders are willing to lend them. In short periods of economic crisis rapid borrowing can moderate a fall in economic output. In extreme circumstances, more borrowing may be less expensive (for the government as well as wider society) than doing nothing or raising taxes. That may be true at the moment, but the debts incurred during the crisis will still have to be repaid at some point and in some way. That statement remains true even if governments decide to carry more debt, print more money or default, making future borrowing more expensive.
The short-term benefits of higher government borrowing are often confused with arguments about the alleged longer-term benefits of public ‘investment’. As I found researching my forthcoming book the ‘economic’ arguments for spending more public money on road building gained ground during the early 2000s although the evidence for or against road building didn’t really change. Few influential people opposed those arguments; politicians and commentators of right and left chose to believe that building public infrastructure boosts the economy.
As I have written elsewhere, there is no proof that road building – or any other form of transport ‘investment’ – makes any significant difference to national economies. Local benefits and disbenefits tend to cancel each other out – even if we ignore the environmental costs. If there is any national benefit it is small, certainly not enough to reimburse governments for their extra borrowing.
The same is likely to be true of most other forms of capital spending financed through government borrowing. We may well need better schools, hospitals and homes for homeless people but the idea that governments can borrow the money to build them and they will pay for themselves is wishful thinking.
Supporters of a Green New Deal often argue that it would “boost the economy”. The thinking behind that argument is similar to the dubious beliefs of politicians about the economic benefits of roads, airports and high-speed rail. It would be difficult to convincingly argue in favour of one, whilst rejecting the other.
A stronger argument for a Green New Deal would be to protect and transfer employment away from activities that are bound to decline towards more sustainable activities for the future. Some more borrowing may be necessary to finance the transition. In the longer-term, a more sustainable economy would spend less on new infrastructure and borrow less for that purpose.
We might like to see more renewable energy, insulation of homes and electrification of vehicles but our leaders may hear those arguments differently. If those things boost the economy, then why not more roads, airports, coal and fracking? Or why not some of both? I have noticed how local authorities justify their road building plans by saying they will expand public transport as well. The net result of expanding both is more movement, which is worse than doing nothing for the climate and the natural world.
The current spending and borrowing spree will not last. Future governments of any persuasion will have to start repaying at least some of the debt. Instead of calling for more yet borrowing, we should talk the language of priorities. In a time of recovery and transition, we cannot afford £29 billion for road building or £88 billion for HS2. We cannot afford to bail out the aviation industry. We should tax polluters and the holders of wealth to pay for the debt. We should invest in the technologies of the future instead of the technologies of the past. We should learn the big lesson of this crisis about failing to prepare for a known threat, and reorient the priorities of government towards the biggest threat of all from climate breakdown