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)
Copyright (c) 2019 Dow Jones & Company, Inc.