There’s been a huge row over
Labour’s tax and spending plans this week. The Conservatives say
they’ll blow a £1.2tn hole in the nation’s finances,
creating a tax bombshell. Labour dismisses
this as nonsense. It says higher tax will
pay for day-to-day spending on things like more
nurses and doctors, and it will only borrow for
higher capital spending. Some £55bn a year for transport,
broadband, green energy, hospitals and schools. That’s a lot more, more than
doubling current public sector investment plans. It’s also a lot higher than
the Conservatives’ promise. Labour plans would raise
government investment back to levels last
seen in the 1970s. That’s over 4 per cent
of national income, raising some big questions
about whether Britain can finance its borrowing, and
whether it’ll be well spent. We sought to find
out how investors and British government
debt might react. The Chancellor, Sajid Javid,
says they’ll run scared. He was talking about Labour
creating an economic crisis within months. But on the financing question,
the government bond market doesn’t appear terrified. The UK government can
borrow for 10 years at a cost of only 0.75 per cent,
a little up from a month ago but still extremely low. We also talked to many
people in the markets. The main view was that investors
would be willing to finance Labour or the Tory
plans very cheaply. For example, Mark Dowding,
chief investment officer at BlueBay Asset Management,
summed up the view saying, there was a once in a
generation opportunity for a big fiscal expansion. But you shouldn’t think that
because bond investors are prepared to fund big spending,
they think it’s a good idea. Many we spoke to thought pushing
so much money out of the door so quickly would lead to
waste and bad investments. The bond market isn’t full
of vigilantes at the moment, ready to push
politicians around. They’re happy to
finance Labour’s plans, even if they think the
proposals won’t work. And there’s a simple reason why. They believe even if
the plans are nuts, they’ll still be repaid,
with at least some interest.