The Conservatives say Labor's £ 1.2tn spending plans would bankrupt the economy. Labor says all its commitments will be fully costed and that the Tories are running scared. Predictably, it has not been taken long for the election to fall into slaughter matches, dodgy dossiers and a battle for economic credibility.
In truth, both parties want to have their cake and eat it. John McDonnell, the shadow chancellor, says it's time to pay more for the investment in infrastructure tax and increase in income tax for the better off.
Sajid Javid has his own version of cakeism. The Chancellor said on the BBC's Andrew Marr that his "controlled" borrowing would meet the UK's public investment needs without the risks that Labor's more ambitious approach allegedly involve. The Conservative Manifesto is in the process of making a promise of cuts in national insurance contributions for low-paid workers.
The response of Sir Nick Macpherson, the Treasury's top mandarin under Gordon Brown, Alistair Darling and George Osborne, suggests that voters might struggle to make much of a distinction between Conservative Borrowing and Labor Borrowing. Has there ever been a time when the spending plans of the two main parties have been so incontinent? Borrowing to invest is only sensitive if it does not result in ever-increasing debt. "
The Treasury said John Maynard Keynes's plans for boost demand when they were first aired in the late 1920s. The answer to this question is "How to generate an economic return" , The higher investment will lead to faster growth, generating enough in higher taxes to pay for the initial capital.
Both chancellor and shadow chancellor have looked at the events of the past decade and concluded that inflation is the dog that does not bark. When central banks slashed interest rates and turned on the electronic printing presses a decade ago, the fear that money would become worthless and prices would rocket. It simply did not happen.
2% in the case of the UK – and rely on some version of the Phillips curve when making their decisions. Put simply, the Phillips curve says there is a relationship between unemployment and inflation, so that when the jobless total comes down, there is more and more pressure on the cost of living goes up.
But something has gone seriously awry with the central bank models. For one thing, it took a lot longer than expected to make any pick up in wages. And even though there are signs of some pick-up in annual earnings due to a tightening of the labor market, this has not led to higher inflation. When the Office for National Statistics publishes its latest bulletin on the cost of living this week, it will show the annual inflation rate below the government's 2% target.
What does it mean to do so? Firms respond by cutting back on hiring or by hiring off workers, and that leads to a fall in earnings growth. Inflation has remained low and so too have interest rates.
Javid said recently in Washington he thinks low borrowing costs are here to stay and nothing in the past decade would suggest he is wrong. Long-term interest rates, which in turn "crowd out" private investment by making it more expensive to finance. Nor wants McDonnell give much truck to Treasury officials giving him the same line if he becomes chancellor. Both men and women are taking a relaxed approach to fiscal policy – tax, spending and borrowing – they are gambling, and they are right. The evidence is that the multiplier effect of government spending – the amount of extra-growth-generated interest rates are higher than real (inflation-adjusted) rates are low, as they are today.
That said, it might not be all plain sailing. There is a legitimate argument about what constitutes investment investment, because building a new school or hospital does not increase the productive capacity of the economy. Similarly, the Institute for Fiscal Studies has a large amount of unfavorable spending.
There is also a danger that the growth-boosting impact of higher interest rates from the Bank of England. Despite evidence that the Phillips curve relationship has broken down, the bank still believes it will eventually hold true again. It thinks there is little spare capacity left in the economy and so does any increase in the growth rate. It is the bank's legally mandated duty to hit the government's inflation target. In those circumstances, Javid or McDonnell would have a choice: suck it or give it to the bank.