Response from Evan Davis

Evan_Davis.jpgAt last. A paper on fiscal policy that tries to break down the polarised argument we're having between fiscal credibility and growth. Ian is right to suggest that we might usefully think about how government spends rather than just the amount it spends, in order to stimulate demand while sticking to the fiscal plan.

I like his "wheeze" that you bring forward £15 billion of austerity measures that have yet to be devised for the next parliament, and spend the money now on growth stimulating infrastructure.

I have just three points to add.

First, I'm rather sceptical of Ian's specific suggestions for raising £15 billion of revenue. I haven't given each of his proposals much thought, but I think they might benefit from closer scrutiny. He has selected them to suit his (perfectly noble) economic goal. Alas, the road to a messy and illogical tax system is paved with good macro-economic intentions. We should avoid making long term mistakes for short term gain. For example, while abolishing higher rate pension relief may or may not be justified, that should be determined on the principles of efficient tax systems not short term expediency.

I'm happy if macro-economists want to devise some time-limited measures that could boost growth without long term damage to anything. But otherwise, I'd prefer us to get the nation's best micro-economists to work on tax and benefits.

My second point is that there's only one thing tougher than raising £15 billion of revenue, and that is working out how to spend it constructively. Infrastructure is undoubtedly "a good thing", but there may not be enough shovel-ready projects to spend that money on. More work on that front is needed, and preferably on the Chancellor's desk as soon as possible.

My third point – again on the how-to-spend-it issue – is that it would be enormously beneficial to the UK if government could find ways of facilitating the economic transition the nation is striving to make at the moment. We know that we need to export more and import less and to that end have to build up the tradeable sector of our economy (the part that exports or substitutes for imports) at the expense of the non-tradeable sector. We also know that industries in the non-tradeable sector, like government services and retailing are facing austerity. What we have singularly failed to do so far is build up the tradeable to any degree. That is why we are in such tough times. Whoever can identify a place to invest a few billion pounds worth of Ian's money to promote the new industrial economy we need to build would be making a huge contribution.

The point is that the while promoting extra spending in the economy is bound to be helpful when the economy is so obviously flat-lining, it is far better if the spending itself promotes the supply-side changes that have to be made sooner or later anyway.

Evan Davis joined the presenter team on BBC Radio 4's Today programme in April 2008 following a six-and-a-half year stint as the BBC's economics editor. Before his promotion to editor, Evan worked for BBC Two's Newsnight from 1997 to 2001 and as a general economics correspondent from 1993.

He previously worked as an economist at the Institute of Fiscal Studies and the London Business School.

Evan is writing here in a personal capacity

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