Responsible borrowing

So Gordon Brown said today (still today here Stateside) that he will allow borrowing to rise to help restore demand; essentially, in order to finance a Keynesian stimulus. Even the Tories recognise the need to allow the deficit to grow to finance counter-cyclical measures, even if they didn't resist the opportunity for a dig at Brown's lack of prudence in the good times.

Meanwhile the Economist has argued that the downturn and consequent need for stimulus has re-awakened an old ideological divide: should public borrowing be used to finance government spending or tax cuts?

It boils down to this - what characterises responsible borrowing is less how much we borrow than how we spend it.

I would like to suggest a few criteria for deciding whether we are employing our borrowed cash responsibly.

Public spending on the public good
If public money is being spent, then it should be spent on things that the public need. This isn't normally a problem for governments; there's normally a backlog of public works that need financing. Nevertheless, the exercise cannot simply be a matter of pumping money into the system. You have to get something for that money.

Value for money
Developing the point, the government are still the keepers of the public purse. The need to generate demand in the economy does absolve the government from the duty to ensure the public gets value for the money being spent. In the short term, the money being spent is being borrowed, but it will have to be paid for by the taxpayer eventually.

Plan to pay
Even economic stimulus must be thought of as an investment. There must be some sense of how it will eventually be paid for, even how it will pay for itself. That payment can be deferred, running a deficit demands this, but it must be planned for. This may be as simple as hiking taxes or cutting spending in better times, but this must make it into the policy before the money is spent. Better yet are those infrastructure investments that will generate revenue themselves in the future. The green investment proposed in the Liberal Democrat recovery plan feels like a good example this.

Focused and efficient
The stimulus must actually stimulate. It needs to be injected into those parts of the economy where it will be "spent on", rather than being lost to paying off debt or saving. Spending aimed at job creation, for instance, should look to create more lower paid jobs (although obviously paying a fair wage) rather than few highly paid jobs.

Minimise leakage
However borrowing is disbursed, the government needs to ensure, as much as possible, that it is the national economy that is stimulated. Within EU, and indeed with any reasonably open economy, this is a difficult task. How does the British government, for instance, ensure that the money it spends on creating jobs is not "wasted" stimulating Eastern European economies via remittances from labourers from those countries? This is not an argument for tighter immigration controls, but it is a real problem with classic Keynesian stimulus in an era of globalisation and open markets. I suspect this may be a strong argument for a co-ordinated, Europe-wide response although I suspect setting up such a thing would be a diplomatic nightmare.

Progressive, not regressive
This one, I guess, is more subjective and ideological than the others. But all public spending should primarily benefit the worse off, and the expense should primarily be borne by the better off. Tax cuts for the rich, the cost of which will eventually be paid by the less well off, either in terms of future tax increases or, more likely, reduced public spending or inflation, do not constitute responsible borrowing in my book.

I doubt the list is comprehensive. But I think it does point to a conclusion (inasmuch as a series of unjustified assertions can) that a properly thought out program of public spending is more likely to be a "responsible" use of public spending than the more haphazard approach of tax cuts - which effectively amount to borrowing money to give away to private spenders. Although, that said, there's probably more scope for ill-considered spending programs to score worse as well.

In summary, the right spending program is a better solution than tax cuts, providing we can work out what the hell it is.