Should the Government Spend on Renewables to Beat the Recession?

Rescuing ailing banks is only one half of the solution to the current global economic turmoil. The other is to keep spending buoyant to prevent a slide into recession.

But how to do that? With worries about ballooning personal debt, falling house prices and rising unemployment, many people are cutting back on spending. Christmas will probably not be enough to revive fortunes on the high street.

One answer lies with the ideas of John Maynard Keynes, the most influential economist of the 20th Century. It was his proposals that helped the world recover from the Great Depression of the 1930s. With unemployment in the UK, the US and many other countries reaching 20% or more in the early 30s, the task was massive. Whole economies were grinding to a halt.

Keynes' solution was simple. Governments needed to spend more. Spending on roads, hospitals and schools would have to offset the lack of private spending.

So should the government start spending on renewable energy?, introducing new grants could be one way to increase consumer spending into renewables, paired with the current high prices of energy, this could be a winner.

Spending further revenue on large scale projects, for schools, hospitals and government buildings to increase their energy efficiency, focusing on those with poor performances, from results of Display Energy Certificates.

Further investment of revenue into macro scale national projects could set the UK on track for energy security for the next few years, and a low carbon economy for the future.

This is pretty much what Chancellor Alistair Darling is arguing. If private spending is slowing, then the government needs to take up the slack by bringing forward billions of pounds of expenditure on construction projects. If government borrowing must rise, then so be it. However, annual borrowing in the UK is one of the highest in the world as a percentage of GDP. And it's rising fast.

One way to increase consumer spending is to use monetary policy. This involves altering interest rates. If recession is looming, central banks could as expected they will cut interest rates - as many did, by half a percentage point, on 8 October.

Even if customer rates are cut, borrowing and spending may hardly increase. With impending recession, people may try to cut back on their debts rather than spend, and businesses may be reluctant to invest.

The alternative to monetary policy is fiscal policy. This involves changes in taxes and/or government expenditure. If taxes fall and/or government expenditure rises, this should stimulate the economy. As long as we are not afraid to spend that is.

Keeping expenditure up is vital and increased government expenditure is probably the best way of achieving this. But another crucial factor is confidence.

If people believe the policy will work, it probably will. Firms will start investing more and consumers will start buying more. The vicious circle of recession could become the virtuous circle of recovery.

But creating confidence depends on politics as much as economics. If people see world leaders mean business and that they won't let recession take hold, then it won't.

If, however, politicians vacillate or there's no international harmonisation of policies, then any remaining confidence may evaporate and we could suffer from prolonged recession similar to that in Japan in the 1990s and early 2000s.

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