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Keynesian cash to kick-start capital spending in primary care - Health Policy Today, Monday 20th October 2008

The big news today is that the Government plans to come out spending as it employs the economic thinking of John Maynard Keynes to counter the contracting tendencies of the banking crisis.  Today’s FT says ‘the chancellor is to call on departments to bring forward billions of pounds of capital expenditure to reinvigorate the economy ahead of an expected recession’. The NHS is a potential beneficiary, as the construction sector could be given the task of building new primary care facilities.

On Saturday the front page of the FT led with the headline: ‘Darling to fast-track public spending’.  Today’s headline is  Keynesian Darling to ‘reprioritise’ spending . Both stories suggest that in next month’s pre-budget report the Chancellor will announce a Keynesian-style spending plan.  

He and the prime minister are reportedly keen to help the construction industry and could hook it up with public building projects, including social housing, schools and ‘primary care buildings’.  

There could be money for polyclinics as a result of a worsening economy.  The FT explains that ‘ the government has plans to build new polyclinics and extra GP surgeries in under-doctored areas, but it is unclear how far they can be accelerated.  Much improvement in primary care facilities has come through a public/private partnership called Lift, which has proved a slow process’.

According to today’s FT, ‘the Tories last night questioned Mr Darling's ability to speed up capital projects given the government’s dependence on the PFI market, which relies heavily on debt markets.  Although PFI deals are still being struck, they are taking longer and costing more because of the credit crunch.’

On Friday, David Cameron ended his political truce with Labour, criticizing the Prime Minister for having helped create the problem.  Rejecting the idea that politics has moved to the left he said:  “it is not a case of replacing the free market, but fixing it”.  

But as the Economist this week notes,  ‘in the short term defending capitalism means, paradoxically, state intervention . ‘Given this, it is inevitable that the line between governments and markets will in the short term move towards the former.  The public sector and its debt will take up a bigger portion of the economy in many countries.’  The danger for the Economist is that the idea of market based reform for the public sector will be made with less conviction, and dismissed with a reference to Wall Street’s fate.

It seems though that the Labour leadership are pursuing the economics of John Maynard Keynes.   A profile of   the man in the news  was helpfully contained in Saturday’s FT.  It explains that Keynes made his greatest impact with The General Theory of Employment Interest and Money in 1936.

‘The heart of the book is the idea that economic downturns are not necessarily self-correcting. Classical economics held that business cycles were unavoidable and that peaks and troughs would pass. Keynes contended that in certain circumstances, economies could get stuck. If individuals and businesses try to save more, they will cut the incomes of other individuals and businesses, which will in turn cut their spending. The result can be a downward spiral that will not turn up again without outside intervention. That is where government comes in: to pump money back into the economy by some means, such as spending on public works, to persuade individuals and businesses to save less and spend more themselves.’

There may be a political driver for the move to the Keynesian cause.  A piece from  Chris Giles and Nicholas Timmins  says what the Treasury is unlikely to shout about is the reason it is so desperate to find extra ways of spending money in 2009-10.  Current plans for that year - which have now been thrown wide open – are for a sharp tightening of fiscal policy, higher taxes and lower public spending’.

The Government is worried that 2009 will be very tight: not a good position to be in when the election will follow a few months later.  The government then is trying to find ways of spending money in 2009-10 from the 2010-11 budget.  A Treasury official tells today’s FT, “we are bringing forward levels of public spending…already set out for years to come”.

The risk of all this spending is inflation, as Time magazine says this week, ‘by borrowing huge amounts of cash to inject into the financial system, governments could create a medium-term  inflation problem  of their own’.

Yet the risk is that without this spending, deflation could take hold unless government takes up the slack.

Speaking on Today this morning, David Cameron suggested it was “quite dangerous” for the state to borrow as it makes it harder for the bank to cut interest rates.  He also suggested that the idea of capital spending wasn’t as straightforward as it sounds because projects take a long time to set in place.  In any case, says shadow chancellor George Osborne, capital spending projects won’t help families who are struggling this winter.

The FT says Labour will claim ‘it is fighting a recession with the tools of John Maynard Keyes’.  Speaking in Brussels last week Gordon Brown said, “we are spending more to get the economy moving; we’re spending more on our work programmes ... We are continuing our high level of investment.  Because we’ve got low national debt, we’re in a position to borrow to keep the economy moving forward”.

The FT says ‘the obvious implication of bring forward expenditure is that the financial year starting in April 2010 will be eye-wateringly tight.  That, of course, will be the next government’s problem’.