Now is the time for the Tories to be borrowing more

How should fiscal conservatism be defined? George Osborne inherited a fiscal deficit that was clearly unsustainable. During the panic over the possibility of a global depression and concerned for his electoral prospects, Gordon Brown had massively inflated government spending. Only Alistair Darling prevented more excess. As Chancellor Osborne said, there was no choice but to retrench: his expression was ‘there is no Plan B’.

But in fact, there was a viable choice. In an article published at the time, I somewhat cheekily christened the fiscally conservative alternative ‘Plan A+’. My argument was that we indeed needed to retrench on spending. But to avoid the adverse repercussions of a sharp fall in aggregate demand (and the consequent wasted resources of recession) we could offset those reductions in spending by increased investment in economically productive public assets — or infrastructure — financed by debt.

The underlying economics is that debt sustainability depends not upon some arbitrary level of debt relative to the size of the economy, but on the balance sheet.