The level of capital spending being brought forward to boost the economy in next week’s pre-Budget report is expected to total less than £5bn ($7.5bn), government insiders told the Financial Times, as Gordon Brown and David Cameron clashed on Monday over the case for a fiscal stimulus.
The prime minister reiterated the case for using tax cuts funded by borrowing, allied to fast-tracked spending, to try to mitigate the depth of the recession. But officials are concerned that unrealistic expectations are being created over the scale of the giveaway. Reports that the fiscal stimulus could total £30bn were rejected by insiders. The accelerated spending element of the package is set to be under £5bn, sources said.
This spending cap reflects practical obstacles to bringing projects forward, many of which – such as planning restrictions and negotiations with private sector partners – cannot be overcome by extra money alone.
The bulk of the capital injection is likely to come from the £3bn a year allocated to Building Schools for the Future, the most ambitious school building programme since Victorian times.
However, particularly in its early years, the £43bn programme has failed to meet its own targets, with fewer than 40 schools built since 2004.
Officials preparing private finance initiatives, which are heavily reliant on the debt markets, will also struggle to bring forward capital projects. Those involved with raising finance say banks are increasingly unwilling to participate, in spite of the, in effect, government guarantee behind many projects.
The political battle over the pre-Budget report is centred on tax, rather than spending.
Mr Cameron entrenched his party’s opposition to unfunded tax cuts on Monday, accusing Mr Brown of planning a “borrowing bombshell which will soon become a tax bombshell”, with instant tax cuts exacerbating the need for higher taxes in the medium term.
In heated Commons exchanges, the Tory leader warned: “Tax cuts should be for life, not just for Christmas.”
The prime minister retaliated by portraying the Tories as increasingly isolated in their opposition to a fiscal stimulus.
“This seems to be the only party that is now standing against what is a consensus developing across Europe and across the world,” he stated. For the first time, Mr Brown warned that “the [central economic] problem is deflation, and the problem of inflation close to zero”. The answer was to “combine monetary policy with fiscal action so that you have the best impact on growth in the economy”.
The two party leaders also crossed rhetorical swords over the state of the pound, with Mr Brown branding the Tories as “highly irresponsible” for warning that his plans to let borrowing rise could precipitate a collapse in sterling.
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