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Govt spending plan 'misguided', economists say

The Government's plan to spend its way out of the looming recession has been condemned as a 'misguided and discredited' approach by a group of senior economists.

Chancellor Alistair Darling revealed a week ago that he wanted to bring forward spending on major state-funded projects in order to kick-start recovery.

The proposal was subsequently keenly defended by Prime Minister Gordon Brown despite a massive rise in public sector debt to record levels.

But in a letter to the Sunday Telegraph, 16 economists blasted the policy.

The signatories, who include Trevor Williams, chief economist at Lloyds TSB Corporate Markets and Peter Spencer, chief economist to the Ernst & Young ITEM Club, wrote: "We would like to dissent from the attempt to use a public works programme to spend the country's way out of recession.

"It is misguided for the Government to believe that it knows how much specific sectors of the economy need to shrink and which will shrink "too rapidly" in a recession.

"Thus the Government cannot know how to use an expansion in expenditure that would not risk seriously misallocating resources."

They went on: "Furthermore, public expenditure has already risen very rapidly in recent years, and a further large rise would take the role of the state in many parts of the economy to such a dominant position that it would stunt the private sector's recovery once recession is past.

"Occasional slowdowns are natural and necessary features of a market economy. Insofar as they are to be managed at all, the best tools are monetary and not fiscal ones.

"It is inevitable that Government expenditure and debt naturally rise in a recession but planned rises in government spending are misguided and discredited as a tool of economic management.

"If this recession has features that demand more active fiscal policy, which is highly disputable, taxes should be cut. This would allow the market to determine which parts of the economy shrink and which flourish to replace them."

Official figures showed net borrowing hitting a record £37.6 billion between April and September - higher than the whole of the previous year.

The sharp increase left Mr Darling's forecasts of £43 billion of borrowing this year in tatters and led to warnings that debt could balloon to £120 billion in three years.

The Prime Minister, however, insists the public finances are in good shape and the Government can afford to borrow to finance a major programme of public works.

Last week Mr Darling singled out housing, energy and small businesses as sectors where spending could be brought forward as well as continued spending on major defence projects, the London Crossrail project and the 2012 Olympics in the capital.