Pritchard again - Fiscal Expansion:

Think about the key points - investment vs current spending, inflation, supply-side gains:

Finally the dawn arrives at our long-benighted Treasury. The Chancellor is right to tear up the fiscal rule book and start to plug an infrastructure deficit that has done great damage to the British economy.

Sajid Javid is lifting the public investment target from a long-term average 1.8pc of GDP - and a nadir of 1.4pc in the austerity years - to the OECD level of around 3pc. The most successful countries are even higher.  

This should have been done in the recession aftermath when the UK economy had a frightening output gap and ample spare capacity. The bang for the investment buck would have been greater. The multiplier would have been more potent.

Arbitrary fiscal rules and contractionary debt targets - shibboleths with scant grounding in economic science - shaped British economic management for a decade. This persisted even after such assumptions were repudiated by the arch-priests of orthodoxy at the International Monetary Fund.

But better late than never. The Government says we need to spend £600bn on infrastructure over the next ten years to plug the gap and prevent the country being left behind in the global rush towards artificial intelligence and digital technology.

The Chancellor is right to hail “new rules for a new economic era”.  The Treasury can borrow until mid-century at real rates of minus 1pc.  He is also correct that “there is a growing consensus around the world that the time is right to do it.”

Investment reflation is the new ethos in Davos, at the Bretton Woods institutions, among the banks. As a former managing-director for Deutsche Bank in Singapore, Mr Javid knows this better than his parochial critics.

The risk of a serious inflation backlash - and therefore a sustained surge in borrowing costs - is almost nil within the foreseeable future. Were rates to spike, the shock would cause a global stock market crash and a wave of corporate debt defaults. The process would therefore short-circuit very quickly.

As Lord Mervyn King said at the IMF last month, the world is stuck in a "secular stagnation" trap. There is a chronic surplus of savings over investment. Global demographics are getting worse, not better.

Yes, the frugal Margaret Thatcher once said it is “always cheaper to pay cash” than to borrow but she was living in a world of anti-inflation bond vigilantes. The current pathologies are more like the 1930s but with no end in sight. Frugality becomes your enemy.  

In short there is no global market constraint on British borrowing so long as the money is spent competently and with an eye on the long-term economic return - that is to say on projects with an average multiplier above 1.0, a low bar. Fears of a Gilts strike akin to the Greek or Italian debt crises are misguided. Eurozone states do not have their own sovereign lender-of-last resort. 

As a precaution, Mr Javid has established a “debt interest rule”. The alarm goes off if interest rates jump and the debt-service ratio rises above 6pc of revenue. It is currently 2pc and trending down. 

The Chancellor’s Rule One is a “current budget” limit stipulating that day to day spending must be in balance over three years. Investment is excluded. We are back to Gordon Brown and the Golden Rule. Good.

The IMF says that right now the total cyclically-adjusted UK deficit is 1.3pc of GDP, compared to 2.3pc in Spain,  2.9pc in Japan, 3.4pc in France, and 6.3pc in the US. We are hardly on the cusp of Weimar. 

The Treasury’s  National Infrastructure and Construction Pipeline says we need to spend £125.4bn over this year and next, half-funded by the private sector. Projects such as the Thames Tideway Tunnel and Hinkley Point C are already underway. Shifting up to the Chancellor’s new targets is not technically easy given the planning times. 

“This is going to have to be really well-thought out,” said Carys Roberts from the Institute for Public Policy Research (IPPR). One suspects that it has been rushed for electoral impact. However, there are maintenance bottlenecks across the country with a high and quick rate of economic return. This is the low-hanging fruit. 

The IPPR recommends a development bank along the lines of Germany’s KfW that borrows up to 2.5pc of GDP each year with a state guarantee, yet its bond are not deemed public debt - the model for Labour’s national investment bank. 

The Chancellor might do well snatch that idea, attribute it to the prudent Germans, and push the UK’s effective investment-to-GDP rate towards 4pc, the benchmark for the world’s best. But today’s pledge is an excellent start. The era of obscurantism is over.