In the run up to the General Election, all the major political parties have (to differing degrees) sought to emphasise that the size of the structural deficit is the biggest issue ‘holding back’ the country and that reducing it is their number one priority should they form the next Government. This has led each of them to make it clear that tough decisions will need to be made about spending (particularly for non-ringfenced departments and services) and public investment.
Unfortunately, we’ve heard much less about how they will take advantage of incredibly low interest rates – the UK government can borrow for 30 years at around 2 per cent – to borrow to invest in productive assets such as houses, skills and transport. Such investment can stimulate the growth and jobs across the country that are also necessary to reduce the deficit.
Focusing on the deficit without addressing the country’s ability to grow its economy is a mistake. As The Economist says: “Britain’s biggest problem today is not the deficit but stagnant productivity growth that leaves output per hour 2 per cent below its peak in 2008. The country’s economic future depends far more on boosting how much Britons produce at work than how quickly the deficit is cut.”
So why are politicians so reluctant to talk about borrowing to invest? I think there are two main reasons: one is of their own making, and the other is in response to what Simon Wren-Lewis calls “mediamacro”.
Over the last five years politicians of all stripes have used comparisons with how we run a household and how we run government to argue for the need to reduce the deficit, claiming you can’t keep running up a credit card bill forever. In this context, saying you will increase government borrowing sounds bad. But the comparison between government and households is a silly one for several reasons not least because it ignores the obvious differences between different kinds of spending.
Debt and deficit are not the same thing. Debt means borrowing money – taking out a mortgage to buy a house or taking out a loan to go to university. Deficit is when your expenditure is higher than your income – if you can’t afford to pay your mortgage payments any more. Deficit is bad – you should always try and stay within your budgets. And borrowing money to cover your deficit is very bad – spending more than you have and covering it up with borrowing is a road to nowhere.
But because deficit-fuelled debt is bad does not mean all debt is bad. A mortgage is debt, and yet having one can improve people’s lives and in the long run make them wealthier. Many companies borrow money because it is the most effective way to invest. When you borrow to invest (and you do it right) the whole point is that you create more wealth than the cost of the borrowing. In economies like the UK, borrowing is one of the main ways to create wealth. And what is true for the private sector is also true for the public sector. Borrowing to invest in skills, housing and infrastructure creates more wealth for the country than its costs to repay the borrowing.
The second reason why politicians are reluctant to talk up the need for productive investment is the media obsession with reducing the deficit. As Simon Wren-Lewis points out in this blog “when Labour leader Ed Miliband forgot to mention the deficit in his party conference speech, the media could talk of almost nothing else but this ‘huge gaffe’. When Prime Minister David Cameron said nothing about the productivity slowdown in his party conference speech, no one in the media bothered to even mention this.”
Saying politicians need to set out the case for borrowing for productive investment is all well and good but maximising the impact of any borrowing will require a strong pipeline of investment opportunities that offer financial and economic returns. As John Van Reenen, Sir John Armitt and others have pointed out, building this pipeline is not an easy task. In addressing this issue cities have a major role to play.
It’s neither feasible nor desirable for central government to be responsible for identifying investment opportunities across the UK. Cities need to identify and develop their own pipeline of investment-ready propositions and then work with Government and private investors to make them happen.
And there are plenty more productive investment opportunities in our cities. Many of our cities struggle to perform very well in part because they lack the infrastructure that would enable them to do so. Take housing as an example. We need to build thousands of homes for sale and rent around the country’s most economically successful, and therefore expensive, cities such as London, Oxford, Bristol and Cambridge. The Government, either directly or by allowing local authorities to borrow more, could easily service the borrowing required to build these homes. Recent estimates value a hectare of agricultural land – space for 40 homes at average densities – on the edge of Oxford at £20,000. This jumps to £4m when the land is granted planning permission for more homes. As neatly summarised by Evan Davis in a recent Newsnight episode (and picked up by Tim Montgomerie in The Times), building on public land, or land purchased at these pre-building permission prices, would require roughly £100 billion investment to fund 500,000 new homes and associated infrastructure – at current borrowing costs the £2 billion yearly debt could be covered by charging monthly rents of just £400 per home.
Beyond housing, cities like Birmingham, Manchester and Leeds all suffer from poor public transport systems that result in car-based congestion and less intensive use of land in their city centres. And nearly every city centre suffers from poor broadband coverage and speed which reduces their attractiveness to firms. These cities and many others have investment opportunities that would create jobs and wealth for their residents and for the country as a whole.
By focusing only on the need to cut public spending and downplaying the need to do more to invest in growth and productivity, all of the major political parties are ignoring a key means through which the national deficit can be reduced during the next Parliament. The cheapest and quickest way of investing in the productive assets that will improve growth and productivity across the UK is for the Government to borrow the money itself. We need our politicians to be brave – they need to make the case to the public as to why, alongside reductions in public spending, borrowing to invest is vital for the country to generate growth and successfully balance the books in the years ahead.