Britain is doomed if it doesn’t soon start investing in its future
Gordon Brown is not a popular figure among readers of The Daily Telegraph, and with good reason; his record as one of Britain’s more successful chancellors ended ignominiously in catastrophic recession and an equally catastrophic collapse in the public finances, thereby proving his own quip that there are two types of chancellor – those who fail and those who get out in time.
Yet to his credit, Brown was also a man of big ideas, an attribute which seems sadly lacking in the mediocrity of today’s political landscape. One of these – ironically given what later happened – was the set of rules he introduced for ensuring sustainability in the public finances, and in particular the so-called “golden rule”.
This stipulated that over the economic cycle the Government would only borrow to invest, and not to fund current spending. Unfortunately it was never fully obeyed, and for political gain was soon manipulated to destruction. Nonetheless, the economic principles that underpinned it were essentially sound. Public sector investment has utility value, providing the infrastructure that is a prerequisite for improvements in productivity, output and growth. It therefore makes sense to borrow for such spending, for over time it ought to more than pay for itself.
In his brief period as a Treasury minister, Lord O’neill, former chief economist at Goldman Sachs, tried to persuade first George Osborne, and then Philip Hammond, to bring back some version of this rule, but with only limited success.
A lot of lip service has been paid to the need for greater infrastructure spending, but the overriding mantra has remained the same; investment in the future must take second place to dealing with the sins of the past or, in other words, eradicating the Budget deficit.
Today’s summit in Leeds to press the Government not to renege on its commitment to Cross Rail North and wider transport investment for the Northern Powerhouse provides a fresh opportunity for a rethink. The Government is already halfway there, in that confronted by a near term economic slowdown, the Chancellor has announced a much looser “fiscal mandate” that gives him scope for almost 2½pc of GDP (£56bn) more structural borrowing in 2020-21 than his predecessor. By so doing he has created the space for a quite significant boost in infrastructure spending. It cannot come a moment too soon.
Capital spending as a proportion of GDP by the Government has been falling more or less continuously since the mid-1970s, mirroring a picture we see across Western economies but in exaggerated form. In 1975, it comprised 8.9pc of GDP, but today is just 2.6pc, a massive structural fall explained in part by political cowardice. Cuts in public investment are less immediately noticeable than cuts in current spending, making it a soft target during periods of fiscal retrenchment. Politically, a decision to delay the building of a new school, road or railway might be expected to provoke less anger than cuts to entitlements or public sector pay.
The swing in public spending away from long-term investment to current consumption has been turbo-charged by demographic change, causing successive governments to prioritise spending on the elderly – pensions, allowances and healthcare – over spending on the young, which would favour education, training and infrastructure.
Not all government infrastructure spending is a public good, obviously. Too often, it is motivated not by social and economic need, but by makework, vote buying pork barrel priorities. I’ve no time for Northerners who moan about the South East
Private Finance Initiative investment has been provided on rip-off terms causing public hostility
gobbling up a bigger proportion of capital spending per head than the rest of the country. There is a good reason for it; all investment spending must be productively applied, and, for the time being, you get more bangs for your bucks in the fast growing South East than anywhere else in the country.
There is nonetheless a compelling case for the sort of high speed rail infrastructure proposed for the Northern Powerhouse. If our smaller Northern cities are connected up in the way proposed, it would create a new economic behemoth, capable of competing for capital and talent with London and the world’s other great metropolises. Yet there is also a compelling case for more infrastructure spending per se. If its long term decline were the result of efforts by successive governments to reduce the size and role of the state, it might be justifiable. In such circumstances, cutting taxes alongside spending would become affordable, enabling individuals and private companies to stand in for the state in undertaking their own investment. Regrettably, there has been no such shrinkage in the size of the state, and therefore no private sector substitution for declining levels of public sector investment. The money has instead been diverted into current spending – mainly healthcare, pensions and other entitlements.
Private Finance Initiative investment was once widely touted as an alternative, but has similarly failed to fill the gap. What is more, it has frequently been provided on rip-off terms, causing considerable public hostility. A case in point is the Government’s increasingly desperate attempts to secure outside funding for nuclear renewal. In the construction of Hinkley Point C in Somerset, ministers have been forced to agree usurious terms which lock UK consumers into some of the most expensive electricity prices in the world.
Hinkley’s French and Chinese backers have demanded a hefty premium to take the risk; it would almost certainly have been cheaper for the Government, with access to much cheaper debt facilities, to have built the thing itself.
The supposed advantages of private involvement – with Hinkley, the Franco/chinese backers are in any case state controlled – in bringing market disciplines to construction costs and management, seem to be entirely absent with this monster.
Add to all this the regulatory barriers that prevent insurers, pension funds and other sources of abundant private saving from investing in infrastructure, and it is small wonder that Britain is seeing some of the lowest levels of so-called gross capital formation anywhere in the developed world.
If the private sector cannot be persuaded to invest on reasonable terms, then the state must do it instead, and if that means cutting back on other forms of public spending, so be it. Brexit makes it all the more vital that we urgently start investing in our long term future again.