Sajid Javid’s spending review isn’t a ‘panic measure’ – it’s part of a global move to exploit low interest rates

Austerity is over. Whenever governments suddenly start spending a lot more money you know there will be an election coming up. And so it will be this Wednesday when Sajid Javid, the chancellor, is scheduled to announce a spending review for the next financial year. As we outlined here, there is likely to be a string of popular spending measures, and also some indications of tax changes to take effect next spring.

So this will essentially also be a preview of the Budget scheduled for November – assuming, that is, that the government is still in power and Mr Javid is still in the job then.

That is one way of seeing things and there is nothing wrong with that. Electioneering is not going away. But there is another perspective: what is happening in the UK is part of a move right across the developed world towards looser fiscal policy.

The US is leading the pack with the Trump tax cuts. The US fiscal deficit is projected to be more than $1 trillion (£800bn) next fiscal year, equivalent to around 4.5 per cent of GDP. In Japan, the picture is much the same, a deficit of 4.4 per cent of GDP last financial year, and though there are plans to try to cut it back, I don’t think many people expect that to happen. Korea has just recorded its biggest fiscal deficit in history and India has just taken a huge $24bn (£20bn) dividend from its central bank, which it will use either to cut the deficit or pay for a stimulus package.

And Europe? Well, Italy is pushing the limits as to what it is allowed to do under the Maastricht rules, with tax cuts in the offing, and Germany is getting a fiscal plan to boost the economy as the mounting evidence of a recession piles up.

Why is all this happening? I think the best explanation is that three things have come together.

First, voters have become fed up with austerity, or put another way, the political support for balanced budgets has weakened just about everywhere.

Second, monetary policy has reached its limits. If there is a general recession, and some sort of slowdown does seem likely, for the current US expansion is the longest ever, then monetary policy cannot help. Cutting interest rates still further would not have much impact. So it has to be fiscal policy that could come to the rescue. The deficit at a little over 1 per cent of GDP would give leeway for this.

And third, very low long-term interest rates, in some cases, negative ones, give a rationale for governments to borrow, at least for genuine investment projects.

The balance of these three forces varies from country to country. In the US, the first and the third matter most, whereas in Germany number two is the main driver of change. But there is sufficient commonality to see this as a global trend, which on past form could run for several years.

Now come back to the UK, and let’s leave the politics aside for a moment. Irrespective of the political pressure to do so, there is a practical need to ease the spending squeeze. There are a number of areas of public provision that have pushed below acceptable levels. Every spending department can make a case for more money but most people would put law and order, local government services, schools, and other social services towards the top of a list of priorities. Expect these to get more money.

Point two, the limits of monetary policy if there is a recession. Here, there is less of a pressing case as yet, but the progress of the economy is so distorted by the whole Brexit business that it is hard to know whether there might be a need for a fiscal boost in the coming months. The most recent quarter, the three months April to July, did see the economy shrink, but that followed a very strong first quarter and early signs suggest that there is likely to be some growth in the current period.

What can be said is that were the economy to experience the so-called no-deal Brexit, leaving the EU without an interim agreement, then we would need a fiscal boost to maintain demand in the short term.

And number three, the case for using very low interest rates to finance public investment. That is really interesting. Common sense says that if you have access to cheap money you should invest it, but the experience of large public investment projects in the UK is not a happy tale. It is not happy in many other countries either. Look at Berlin’s efforts to build a new airport: it was supposed to be completed in 2011 and is not open yet. It is possible it may never open. But our own experience with Crossrail in London, the nuclear power programme, and the ballooning cost of HS2, while not quite as bad as that, is discouraging too. Common sense says we should be very cautious about grandiose projects.

The answer, and I think this will be something to look for this week in the chancellor’s plans, is to use the availability and low cost of investment funds to back an array of more modest projects. These might include more motorway widening, tackling black spots on other roads, improving existing railway connections, particularly in the north of England, in Wales and in Scotland, more funds for housing associations to build more homes – the list is long.

The one thing that is clear, though, is that the funds are there to pay for sensible infrastructural investment. So let’s see how our new chancellor gets on with it.