By Jason Douglas 

BARNSLEY, U.K. -- Big-spending government is coming back.

Prime Minister Boris Johnson is promising voters in Thursday's U.K. election GBP100 billion ($128 billion) of investment in infrastructure and billions more for policing and health care.

His main rival, the Labour Party's Jeremy Corbyn, is offering an even greater bounty, with hundreds of billions in spending and borrowing to remake Britain as a 21st-century state-run economy, complete with free broadband in every home.

With these pledges, the U.K. joins the ranks of advanced economies where politicians are signaling an end to years of constrained fiscal policy. Public spending is back in vogue, even among some parties on the right with a traditional zeal for balanced budgets and a mistrust of big government.

In the U.S., President Trump's tax cuts and military spending pushed the federal budget deficit to $1 trillion in the 12 months through October. France and Spain are relaxing budget goals to pay for tax cuts and extra social benefits to soothe disaffected voters.

Normally abstemious countries including the Netherlands, Finland and Germany are boosting outlays on welfare, defense and infrastructure. In Japan, Prime Minister Shinzo Abe's cabinet has approved a $120 billion stimulus program to revive flagging growth and help regions hit by an October typhoon.

The move toward greater fiscal activism comes after years of heavy lifting by monetary authorities that have left central banks depleted, and even maligned for exacerbating inequality by turbocharging asset prices.

Populist movements of the left and right, meantime, have found fertile soil in regions left behind by patchy economic growth, leading mainstream parties to rewrite the economic playbook to keep voters sweet. Citizens grumble about creaking infrastructure and many fret that the private sector isn't up to daunting challenges such as climate change.

The shift is coming at a time when economic clouds are darkening, with a U.S.-China confrontation over trade pinching growth and spooking investors.

Greater public investment could help lighten the gloom, with spending in areas such as infrastructure and education contributing to a healthier, more balanced expansion, say policy makers such as International Monetary Fund chief Kristalina Georgieva and outgoing European Central Bank President Mario Draghi. The IMF and the European Commission -- the European Union's executive arm -- are urging countries with fiscal room to spare to spend even more to keep global economy humming.

"There's a whole litany of reasons why this is the right thing to do," said Adam Posen, a former Bank of England official who heads the Peterson Institute for International Economics, a think tank in Washington, D.C. Private investment is low and in many places infrastructure needs updating, he said, adding that low interest rates support borrowing for productive investment.

A fiscal shift isn't without risk. Recent history is littered with instances, from Latin America to the eurozone, where investors have soured on administrations they viewed as profligate, prompting painful reversals when borrowing costs spiraled. A year ago, Italy's then-populist government watered down its plan for greater borrowing in response to rising interest rates that were pushing the economy toward recession.

With unemployment low in many jurisdictions contemplating a fiscal splurge, extra spending could cause economies to overheat, requiring central banks to step on the brakes. Voters may balk at higher taxes, or grow more disillusioned still with mainstream politics if promises aren't kept.

If spending promises are financed by borrowing, governments need to remember that today's low interest rates may not last forever, said Kenneth Rogoff, professor of economics at Harvard University. The bill may fall due on taxpayers or pensioners when economic conditions are less benign, he said.

"The notion that it's just free, that we can just spend more money and no-one's going to pay for it, is very naive," he said.

In the U.K., such risks are heightened by the country's planned departure from the European Union, which is clouding the economic outlook, unsettling investors and absorbing huge amounts of government time and energy. Faced with such uncertainty, investors might be unwilling to pony up for Britain at current low rates, said Mr. Posen of the Peterson Institute.

"Now, the regime shift is real. The U.K. may not be becoming Greece, but it might be becoming 1970s U.K.," Mr. Posen said, a reference to the boom-and-bust cycles that dogged the economy in the past during spells of political and economic mismanagement.

In the turbulent period after 2009, many countries took steps to rein in ballooning budget deficits. The U.K.'s drive towards austerity stood out. Unlike Greece or Ireland, it wasn't forced by creditors. And unlike the U.S., the U.K. eschewed tax increases, with successive Conservative-led governments since 2010 straining for budget discipline solely by shrinking state spending.

Conservative Prime Minister Margaret Thatcher had railed against big government when in the 1980s she made the U.K. into the crucible of a free-market revolution that swept the globe.

Now, ahead of the election, Mr. Johnson has rewritten his party's fiscal rules to permit GBP100 billion of extra borrowing over the next five years to plow into capital projects.

Already the Conservatives have penciled in GBP22 billion of that for revamping schools, building new flood defenses and greening the economy. They have earmarked GBP500 million a year to fix potholes. Mr. Johnson's plans include spending on transport, high-speed broadband and house building, as well as extra cash for voters' cherished National Health Service.

Voters are also being promised some personal tax cuts, paid for largely through scrapping a planned reduction in corporation tax.

Behind Mr. Johnson's pitch are political imperatives. He needs to sweep up opposition-held districts to win big enough to meet his goal of taking the U.K. out of the European Union by the current target date of Jan. 31.

In promising a fiscal boost, he is aiming to sharpen his appeal among traditional Labour voters in areas that support Brexit. Research suggests the British electorate is growing more concerned about poverty and eager for more public spending after years of government restraint, said Torsten Bell, director of the Resolution Foundation, a nonpartisan London think tank focused on living standards.

"Austerity fatigue has definitely set in," he said.

The economic and political forces fueling the shift toward greater spending are at play in places such as Barnsley, a former coal-mining town in northern England.

Voters complain of dilapidated transport links and worsening homelessness, and plead for relief after years of belt-tightening. Between 2010 and 2018, public spending in Barnsley and surrounding districts, an urban area of 250,000, shrank by 40% after adjusting for changes in prices, according to an analysis by the Centre for Cities, a think tank focused on boosting urban economies.

"The town has suffered greatly over the last 10 years," said Andrew Mayo, an administrator with a charity. "There's no money anymore."

One manifestation is the local rail service. Visitors arriving by rail from neighboring Sheffield do so on twin-carriage "Pacer" trains converted from buses in the 1980s.

"Pacer trains should have been consigned to the railway museum many years ago," said Dan Jarvis, a Labour lawmaker who is seeking re-election on Thursday.

Barnsley has for years been a Labour stronghold, but it also voted heavily in favor of leaving the EU in 2016, putting it in Mr. Johnson's sights. The Conservatives are projected to win at least one of the area's four districts Thursday, according to an analysis by pollster YouGov published Tuesday.

A challenge both main parties face is from the Brexit Party, an upstart group with a populist bent that advocates an abrupt split with the EU.

As the campaign has moved along, the party's popularity has weakened sharply. But it is still siphoning pro-Brexit voters from the Conservatives and Labour in a handful of areas, which could make the difference between an outright victory or another hung parliament.

In the race for votes, fiscal policy is center-stage. Mr. Johnson has laid out plans for a "leveling up" of the British economy to narrow the gap between northern regions and the affluent south around London.

To further extend the party's appeal, he also has diluted the Thatcherite vision that has long dominated Conservative thinking. His party's manifesto, for example, contains a pledge to hand government ministers the power to aid struggling businesses with taxpayer cash -- a policy popular with voters but anathema to free-marketeers. The government's ability to bail out failing companies is also constrained by membership of the EU.

"People voted to take back control," Mr. Johnson said at a recent stump speech, referring to the 2016 referendum on exiting the EU.

Mr. Corbyn's calculation is that Britons are ready to swing behind his vision for a Britain steered by a more interventionist state, where the government owns or controls companies providing banking, postal services, mass transit, generic drugs and telecommunications.

Labour's manifesto calls for an GBP80 billion-a-year increase in day-to-day spending -- paid for through higher taxes on corporations and high-earners -- and hundreds of billions of pounds of borrowing to finance nationalizations, public works and investment in low-carbon technologies.

His plans for a greener Britain echo the Green New Deal proposal in the U.S. that prescribes huge public spending to wean the country off fossil fuels and create jobs.

Opinion polls suggest Mr. Johnson has the edge. The Conservatives are projected to emerge as the largest party in Thursday's vote, though opposition parties may yet deprive Mr. Johnson of the comfortable majority needed to govern freely.

Under Conservative plans, state spending as a share of gross domestic product would rise modestly, to 41% by 2024, from just under 40%, according to the Resolution Foundation. Labour's plans imply a bigger uplift, to 45%. Under both parties' plans, public investment would rise to levels not seen in the U.K. since the 1970s.

On average, government spending in rich nations will rise to 41% of national income by 2021, from 40% in 2018, the Organization for Economic Cooperation and Development projects. That would mark the first turnabout since 2009.

Silvia Dall'Angelo, senior economist at Hermes Investment Management in London, said many investors would welcome higher government spending, especially if targeted at solving economic problems such as feeble productivity growth.

After a long spell of monetary stimulus, "it's time to try something different," she said.

A major challenge for governments, say former policy makers and officials, will be following through. In the U.S., political bickering has scotched efforts to get bipartisan approval for a $2 trillion package of infrastructure spending.

Countries pledging new outlays on roads, railways and bridges, or promising extra services such as child care, will have to deal with the time-consuming nitty-gritty of securing permissions, drawing up plans and finding workers.

"Just announcing telephone numbers of extra spending does not necessarily translate into good-value investments or better services," said Jill Rutter, a former U.K. Treasury official who's now a senior fellow at the Institute for Government, a London think tank focused on improving policy-making.

Whoever wins, voters in Barnsley are skeptical much will change. "Most people think those promises have been made before and they never happened," said Peter Mulrooney, vice chairman of Barnsley Churches Drop-in Project, a charity that helps drug addicts and the homeless.

Andrew Shaw, a record-store owner, said he would probably vote Labour, but he fears a new burst of spending from either party could prove fleeting, leading to an eventual reckoning.

"I'm worried that my daughter will just get another raft of austerity in 10 years," he said.

Write to Jason Douglas at jason.douglas@wsj.com

 

(END) Dow Jones Newswires

December 11, 2019 11:25 ET (16:25 GMT)

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