In any sane world this would now lead to an urgent reversal of economic policy. Keynesians, from this humble blog to distinguished Nobel prizewinners, have been saying for the last two and a half years that the austerity programme would lead to economic stagnation or worse, others, including the IMF, have eventually joined in the chorus, and the results confirm our views.
There is no economic difficulty in reversing the policy. My own version of a plan B was published on this blog in August 2011 and I stand by it. Briefly, and with one or two modifications in the light of current circumstances:
- projects for the improvements of the existing infrastructure (filling up the many potholes which will be left when this snow melts, improvements to the northern rail network, expenditure on schools and hospitals, measures to clean up the beaches, countryside and urban areas.) These would have a much more immediate Keynesian multiplier effect than fancy projects such as the HS2 railway, where much of the early expenditure goes on land purchases and lawyers' fees;
- massive investment in housing, both improvements to make empty properties habitable and new housing on sites where planing permission has already been given. There is absolutely no need for scrapping planning regulations to stimulate the housing industry. What is lacking is the demand. This can be stimulated by a combination local authorities house building for letting, along with affordable mortgages from one of the largely state-owned banks;
- reversal of cuts to the probation, revenue collecting, border agency and other essential public services;
- investment in green technologies and energy sources;
- investment in universities and the arts, sectors where the UK still has international competitiveness;
- expansion of genuine craft based apprenticeship schemes and technical training;
- a cut in VAT back to 15%, balanced by a land value tax, or its less comprehensive poor relation, a mansion tax.