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Osborne's grand plan to boost growth is a dogma-ridden hybrid that will squeeze the low-paid and rebound on the economy
Until the OECD officially predicted a double-dip British recession today, the spurt of hype and guesswork preceding George Osborne's autumn statement was just about doing its work. The airwaves crackled with news of the £30bn jump-leads to be attached to the national infrastructure plan, to be part-funded by pension funds, and coalition high-ups talked up 500 projects, including 50 or so "top priority" schemes that will get their money as soon as possible: electrification of the TransPennine rail line between Manchester and Leeds; upgrades to the M25, M3 and M56; work on the good old Kingskerswell bypass. All was sweat, cement and national renewal: a vision worthy of Stalin's Russia – without quite so much death.
It is easy to get lost in the midst of what seems to be a fit of grand-scale creative accounting but as I understand it, £10bn of the new plan's funds will be stumped up by the government. Some £5bn of that – a sum which looks likely to be snatched from millions of the low-paid, more of which in a moment – will have been spent by 2015, with the other half to follow later. The total, it should be noted, is a mere fraction of what is already being cut from capital spending.
Moreover, the details of the £20bn supposedly to be provided by non-government sources are very unclear: last week, there were reported noises from Whitehall insiders suggesting that the sum amounted to an "aspiration", while pension funds confirmed they were only in the foothills of talks with government, and the odd sceptical voice wondered whether such risk-averse interests would actually want to get involved.
This much we know. Pension schemes will not be the only big investors involved; there will also be a sizable role for sovereign wealth funds. On the FT's website on Sunday there was a piece by Lou Jiwei, the chairman and chief executive of the China Investment Corporation, which punts around a reasonable share of China's foreign exchange reserves. His set-up, he said, is collectively "keen to team up with fund managers or participate in public-private partnerships in the UK infrastructure sector as an equity investor". Here was what you might think of as nationalisation at a distance, whereby for all that the political class bigs up the dynamic wonders of Anglo-American capitalism, your local branch line, school gym or toll road will soon be a source of revenue for the state capitalists of Beijing. Interesting times, and all that.
PPP, you may recall, was what the last government intended to call the private finance initiative when it scented trouble; PFI's serial insanities were again pointed out by BBC Panorama this week, in a programme titled Who's Getting Rich On Your Money?. Since Osborne came to office he has signed off on 61 PFI deals which will eventually cost us about £33bn: but he has now affected to repent. Last month, he announced PFI was being reviewed, and the Treasury was aiming at a new approach which would mean "a lower cost to the taxpayer" and "better value for public services". The arrangements behind the national infrastructure plan seem to be the answer.
But here's the problem. The most important point is simple. Even if they don't involve the heights of lunacy scraped by PFI, the returns on the new scheme will have to be higher than those on government bonds in order to pull in investors. For Osborne, though, this has one big advantage: as with PFI, what amounts to borrowing to fund capital spending can be put off-balance sheet. Such are the wages of deficit fetishism: if the funds were earmarked for investment rather than consumption, he could raise the money by orthodox borrowing, but at that point the school play titled The Greek Defence would be over. Instead, he takes the circuitous and more expensive route. As one sage on Twitter put it, "China applies its vast surpluses by lending to the UK above prevailing gilt rates, securing future revenue. Snake-eats-own-tail."
This week I spoke to Richard Murphy, the economist and tax expert, whose new book has the self-explanatory title The Courageous State and brims with imaginative thinking. Using pension funds for national investment, he told me, could be done much more efficiently than the Osborne plan. In exchange for the vast sums granted in pension tax relief – £38bn at the last count – we could be compelling funds to put money into the very infrastructure projects the government is so keen on – and with no need for a mouthwatering rate of return to draw them in. The same logic, he says, applies to credit easing, the roundabout method Osborne is using to persuade banks to supply businesses with money. Again, were we to insist on a quid pro quo for pension tax relief we could channel funds into a national investment bank and send credit directly to those businesses. But that's all surely too ambitious for Whitehall, and far too dirigiste for the free-marketeers at the top of government. In its present state, Britain needs big push after big push; their approach remains limited to nudge economics.
And so to one other likely aspect of the autumn statement. According to several sources, some or all of the first £5bn for the infrastructure plan will come from squeezing tax credits for the low-paid. Here's a simple point, but it needs making: if that happens it'll represent another knock to demand. Though it's not been pointed out nearly enough, much the same applies to the money being demanded from millions of people in the public sector who will be out on strike on Wednesday. If nurses, teachers and firefighters have to find hefty amounts of money for increased pensions contributions the shock to the economy will amount to billions. From the VAT hike to Iain Duncan Smith's mad £500 benefit cap, this keeps happening. Why?
The coalition seems to be locked into an economic tragedy. Well aware of the speed at which things are going south, unable to pursue the right remedies thanks to its own dogmatic constraints and therefore tumbling into incoherence: giving with one hand and snatching with the other; extolling the wonders of the doughty British spirit while selling England by the pound. Osborne appeared on TV today, dressed in his now customary fluorescent building-site jacket, as if to suggest that even if it took financial chicanery and robbing the poor, Britain would soon be working again. "I think the public is behind what the government is doing," he said. He didn't sound that convincing.