Jeremy Corbyn drilled down on how he would spend his planned £500 million stimulus on the Andrew Marr show this morning (25 September.)
There is a misunderstanding. A government's finances are not like a households’. If a household cuts back, its finances will improve. If a government cuts back, the economy will slow, tax receipts may be less than expected, and the result of less government spending may be higher government debt. This has surely been the case with Greece.
Mr Corbyn wants to see government finances boosted by £500 billion - but not in one go. Now he is the undisputed leader of the Labour Party all that stands between him and his stimulus is the small matter of Theresa May and a massive deficit in the opinion polls versus the Tories.
Meanwhile, it is thought that the UK's post-Brexit Chancellor, Philip Hammond, will announce a £50 billion fiscal stimulus in his Autumn Budget. The feeling at the moment is that the markets will be unperturbed by a £50 billion injection into the economy, but perturbed rather a lot by £500 billion.
But how much would a half a trillion spending spree cost the UK tax payer in interest? Speaking on the Andrew Marr show, Mr Corbyn said: "It will be an investment that will bring in greater tax income."
He said the investment will give the infrastructure needed for "railways, broadband, gives the investment you need in developing high tech sustainable industries." But then went on to complain about banks not providing the investment needed.
So how much would £500 billion cost? Which by the way would be around a third of total public debt and slightly more that the Bank of England has spent on QE so far and is planning to spend.
But what would the interest be? Right now the government can borrow over ten years at just under 1%. So 1% of £500 billion is £5 billion a year and £50 billion over ten years. Seen like that, maybe it is not such a huge sum. Of course, there is no guarantee that if the government really did seek to borrow £500 billion it could get away with a mere 1% interest rate, the more it tries to borrow, the higher the interest, at least in theory.
But would such a stimulus really add up?
Aside from how it may push interest rates up, there are three key arguments against, although the first argument comes from fairy land, or, if you prefer its more formal title, economic theory. According to theory, or at least the theory that has held sway for the last few decades, if the government seeks to borrow more, households, with their true rational expectations, would second guess the government and assume tax rates would increase in the future to fund the stimulus, and thus save more, cancelling out the effect of the stimulus. It's a strange theory and one which seems to be believed solely by economists and writers of fiction, assuming that is they are different people. And maybe it is believed by authors of austerity, but then the jury is out on whether or not such people fit into that same category populated by the likes of J.K. Rowling, George R.R. Martin and Dan Brown.
The second argument suggests that the economy is like a cake, the bigger the slice of the cake that the government takes, the smaller the slice for the private sector; in short, public spending crowds out the private sector. Such an argument can indeed stack up at certain times, but surely not at a time when there is a global savings glut, company profits to GDP are near an all-time high, but private sector investment is low.
The third argument against is more telling. There is a real danger that such a stimulus will boost the economy, but lead to an exodus of cash abroad, spent on imports, making the UK's current account deficit, which recently hit an all- time high, even bigger; this may in turn provoke a bona fide sterling crisis.
A £500 billion government stimulus may make sense, but frankly for it to really work there needs to be similar stimulus packages world-wide. The UK's GDP is roughly 5% of the G20's GDP. So if we saw a £10 trillion stimulus package across the G20 that would sort out the global savings glut, end the threat of deflation, and create a boom like nothing that has been seen before. Of course, there would be risks, and such risks would surely prove too great for all G20 governments, but it may also stop the rise of political extremism in its tracks and thus the risk of not doing a global fiscal stimulus may be greater than the risk of doing it.