Sajid Javid and John McDonnell in spending war with billions to be splurged whoever wins election

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Sajid Javid and John McDonnell launched an election spending war today that will mean major increases in borrowing whoever wins.

The Chancellor loosened the Treasury purse strings for a £100 billion splurge on roads, rail, broadband and buildings over the next five years.

In a rival speech, his Labour shadow went further, promising to max out the national credit card to fund £400 billion of “investment on a scale never seen before in this country”.

Both the former banker and the veteran Marxist jettisoned their party’s previous fiscal rulebooks for a “spend, spend, spend” general election that could boost jobs and the economy — but risk landing taxpayers with ballooning bills if interest rates suddenly shoot up.

Both claimed a green light for spending on big ticket projects on the grounds that borrowing is so cheap at the moment. The Bank of England’s Monetary Policy Committee today voted to keep the base rate at 0.75 per cent. Two members voted for a cut: Jonathan Haskel and Michael Saunders.

Speaking in Manchester, Mr Javid announced three new fiscal rules to replace the strict corset that was imposed after the 2008 crash to restore economic credibility.

He trumpeted them as “new rules for a new economic era” that would prevent unfunded giveaways while allowing for “sustainable” investment on infrastructure.

“Historic low borrowing rates mean we need to adjust our framework to fund a decade of renewal,” he declared. “Incredibly, at the moment, we can borrow in real terms at negative rates, meaning it is a responsible time to invest.”

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Rule One, the “current budget rule”, says the Treasury will balance the budget over three years, banning an overdraft on day-to-day spending. Economists said it would prevent the Government offering unfunded tax cuts or splurging on pay rises or extra staff without funding them fully through taxes.

Rule Two, a “debt rule”, allows more borrowing to invest in infrastructure from roads to hospitals and schools upgrades as long as they do not exceed three per cent of GDP over the forecast period.

Rule Three, the “debt interest rule”, means an alarm is tripped if interest rates rise, requiring the Government to reassess its borrowing plans. It would sound if the cost of debt interest went above six per cent of tax revenues. Mr McDonnell, in his speech, set an alarm at 10 per cent.

According to Mr Javid, the new rules give room for £100 billion of investment if the Tories win — and contrast with Labour’s plans for many hundreds of billions more of spending on an unsustainable basis. He also set a target that debt as a percentage of national earnings must fall over each five-year parliament.

Paul Johnson, director of the Institute for Fiscal Studies, said the Chancellor’s new fiscal rules were “broadly sensible”. He added: “They allow for more investment spending but with clear constraints.”

In a speech in Liverpool, shadow chancellor Mr McDonnell pledged “investment on a scale never seen before in this country” and outlined his fiscal rules for the next Parliament to oversee this, if Labour won power, with a proposal to exclude borrowing for investment from the borrowing targets.

Services returned to public ownership by Labour, such as rail, energy, water and mail, would be counted among government assets on the UK’s overall balance sheet, to offset the debt built up to pay for infrastructure reforms.

Mr McDonnell said Labour’s fiscal rule “will mandate us to deliver an improvement in the overall balance sheet by the end of the Parliament. So that when we invest in the infrastructure our country desperately needs, it’s recognised both as a cost and as a benefit. Yes — adding to the government’s debt, but also adding to the government’s assets”.

Listen to today's episode of The Leader here:

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