Given the dire state of the public finances, the Conservatives have rightly resisted the temptation to seek short-term political gain by engaging in a bidding war with the government based on increased borrowing and unfunded tax cuts.
The Conservatives may have suffered a temporary dip in popularity as a result of their principled stance. Yet in the years to come they will benefit from a gap developing between their policies and those of the government.
As the effects of recession expand from the financial sector to the wider economy and unemployment balloons, it will become very apparent that – as in Japan during the 1990s – extra state spending will not bring about economic recovery.
Indeed, higher government borrowing threatens to ‘crowd out’ the private sector investment needed to bring about economic growth. Confidence in the UK’s fiscal stability could be shattered.
If foreign investors and multinationals know that British taxes will, sooner or later, have to rise dramatically to pay for a Keynesian spending spree, they are likely to take their money elsewhere.
There is also a danger that, as with Roosevelt’s New Deal, the state will gain