Page last updated at 13:40 GMT, Sunday, 26 October 2008

Darling spending plan 'misguided'

Alistair Darling
Mr Darling's spending policy is based on Keynesian economics

The government's plan to spend its way out of the looming recession is "misguided and discredited", say leading economists.

Chancellor Alistair Darling wants to bring forward spending on key state-funded projects to kick-start economic recovery.

But a group of 16 economists say it risks damaging private sector recovery.

Separately, the prime minister said fuel and food bills should start to come down early next year.

It is misguided for the government to believe that it knows how much specific sectors of the economy need to shrink and which will shrink 'too rapidly' in a recession
Group of leading economists
Letter to The Sunday Telegraph

Gordon Brown said that as oil prices fell this would bring down the cost of other commodities, easing pressure on people's spending.

He also told the BBC that low interest rates should limit damage caused by the economic downturn.

Official figures showed that the UK's economy shrunk between July and September by 0.5%, putting the country on the brink of a technical recession.

The chancellor has signalled he will look to tackle the downturn by investing heavily in public works in a programme based on the interventionist policies put forward by 20th Century economist John Maynard Keynes.

'Monetary tools'

But in a letter to the Sunday Telegraph, the group of economists criticised the policy.

The signatories of the letter include Trevor Williams, chief economist at Lloyds TSB Corporate Markets, and chief economist to the Ernst & Young ITEM Club, Peter Spencer.

"We would like to dissent from the attempt to use a public works programme to spend the country's way out of recession," they wrote.

"It is misguided for the government to believe that it knows how much specific sectors of the economy need to shrink and which will shrink 'too rapidly' in a recession.

"Thus the government cannot know how to use an expansion in expenditure that would not risk seriously misallocating resources."

They added that public expenditure had already increased rapidly in recent years and that the state may become so dominant that it would "stunt the private sector's recovery once recession is past".

To managing the slowdown, "the best tools are monetary and not fiscal ones" they said.

Meanwhile entrepreneur and cross-bench peer, Lord Bilimoria, also expressed concerns about the implications of the policy on taxation.

"I think part of the problems we've got now have been caused by the government over the past ten years having spent far too much and not having enough for a rainy day now," he told on The World This Weekend, on BBC Radio Four

"So I really do believe that there isn't much room for the government and with all this extra borrowing that it's having to take, there is a scare that taxation is going to go up even higher."

Interest rates

Public borrowing was a record 37.6bn between April and September, official figures show - greater than the whole of the previous financial year.

Mr Darling had previously forecast 43bn of borrowing from April to March 2009 .

During the last world downturn interest rates went up to 18% and that's what caused the huge damage that went on for years for businesses and homeowners
Gordon Brown

The prime minister has said he is confident in the state of public finances to support the spending plan.

And he has again defended his claims to have protected Britain from a cycle of boom and bust - saying that having made the Bank of England independent, interest rates had been kept low during the current downturn.

"What I said is we're not going to return to 15% interest rates like under the last world downturn. Interest rates in Britain are low: they're 4.5%," he told the Politics show in Scotland.

"During the last world downturn they went up to 18% and that's what caused the huge damage that went on for years for businesses and homeowners."

He added that the fall in oil prices - which has more than halved from its $147 a barrel highs - should be reflected in gas and electricity bills as well as food.

"The impact on people's standards of living has been all from the oil price and the food price - your two basic commodities that every household has got to buy - so that's why people's shopping bills have been higher."

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