By Anthony Painter
So this explains why net public investment is scheduled to fall from £38.6billion in 2010-11 to £21billion in 2016-17. And it’s economically mad. Capital investment has a higher ‘multiplier’ – ie a greater impact on growth than tax cuts or increases in current spending on services. To cut it creates undue economic harm and over time - it will pay for itself as the country’s growth potential is enhanced.
There is an obvious need for tens of billions of capital investment – transport, energy, digital infrastructure, higher education, schools, skills and new housing. The Government’s National Infrastructure Plan identifies £250billion of needed infrastructure investment. There should be a register of ‘shovel’ or service-ready projects running into the tens of billions that should be ready at any time to be brought forward should the economic need to do so be there.
The IFS demonstrated in its green budget that a £9billion short-term stimulus can be initiated without harming medium-term consolidation. There are some signs that pension funds are also very willing to invest in public infrastructure projects. It is important to create investment vehicles for them to do so. A National Infrastructure Bank along the lines of the European Investment Bank (of which we are a member!) would make sense to enable this investment to be channelled into our infrastructure needs as soon as possible.
The SMF has argued that there is a different way to consolidate – a fiscally neutral stimulus – in its recent pamphlet, Osborne’s choice. Essentially, this involves, in the American vernacular, shifting expenditures from recurring entitlements to discretionary investments. Once you have built a road you don’t need to build it again. However, you have to pay a tax credit every year while you are legislatively committed to do so. What’s more, entitlements are more politically sticky. The SMF identified £15billion of expenditures that can be shifted from current to capital expenditure.
One final aspect to this approach that needs to be considered. There is a perverse accounting logic at the moment when it comes to prioritising investment. There is current expenditure such as certain elements of welfare-to-work, skills and higher education (eg engineering degrees) that have the characteristics of investment rather than current expenditure. Even if we reverse the short-termist political logic of cutting capital expenditure then we may still miss these important investments.
Actually, there is quite a bit that can be done in the short-term to boost growth now and in the future. It can be done in a fiscally responsible manner. Actually, it’s irresponsible not to do it. This doesn’t alleviate the pain of returning to a more fiscally sustainable path but it does salve some of the economic pain. It will create jobs and growth and help reduce the deficit more effectively in the medium term.
An invest to grow strategy while pursuing a fiscally sustainable policy is precisely what has been proposed by the Obama administration in its 2013 budget. It reduces the deficit by 3% from 2012 to 2013 and eliminates the primary deficit by 2018. And it still finds room for massive investment in infrastructure and human capital. For me, this is the essence of what the In the black Labour argument was about. It argued for an ‘enterprise’ rather than a ‘welfare’ state. To achieve that requires political leadership, determination and a move away from retail politics. It turns out that it’s the politics, stupid.
Anthony Painter is a writer and commentator. He co-authored "In the black Labour" and his book on the future of the left will be published later this year.