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Making The Case For Public Investment

The Labour Party comes into the election campaign with bold proposals for transformational public investment programmes. In his speech of 7th November John McDonnell announced a substantial public investment programme – with a £150 billion Social Transformation Fund over 5 years (annual average of £30 billion) and a £250 billion National Transformation Fund over 10 years (as in the 2017 Labour Party Manifesto and annual average of £25 billion). 

Much of the early austerity programme of the Coalition government focused on public investment. It was a significant reason why there wasn’t hostility initially towards the austerity programme of the Coalition government by the public – it took time before the cumulative effects of holding back health expenditure, people’s pay and benefits took hold. Then there was a further acceleration of austerity and cuts after 2015. The impact of the lowering of public investment also took time to build up. The Tories appear to be belatedly recognizing that austerity has failed and that a boost of public investment is required. 

All sorts of specious arguments will be advanced for this reversal – ‘the efforts of the British people have paid off’, the ‘economy is stronger’, etc... The importance of Labour’s proposals for a green new deal, regional transformation funds, and free broadband is not about addressing the shortfalls of public investment under austerity. These proposals are particularly important as they are designed to address the major challenges of climate change and inequalities. 

The responses of the Tories and Liberal Democrats are typical - to revert to throwing around large numbers and issuing debt scares. The central issue should be whether the proposed investment and transformation programmes match the challenges we face. It is difficult to argue that we do not face a climate emergency or that there is no need to correct regional inequalities.

The transformational investment programmes are long-term and the full benefits will take many years to realise. Many will say that ‘we cannot afford’ these investments, but we will ask whether we can afford to not make these investments. It will be of little comfort to us that the debt level is low when climate change has not been addressed or when areas of high unemployment continue to suffer.

To shout down Labour’s plans, the costs of the programme will be exaggerated and similarly the debt implications. In assessing the quoted costs of the investment programme, we must remember that those employed on the programme will pay taxes on their income and subsequently on their spending. There will be further tax revenues as the investment creates more jobs and there are likely to be further benefits from new private investment.

Some argue that a period of low-interest rates is a good time to increase public investment. Although, it is welcome that any borrowing can be undertaken at low-interest rates —but let us be clear, the investment is needed whether interest rates on government borrowing are below 1 per cent or over 5 per cent. The drive for Labour’s transformational investment is because of need.

The usual charges of running deficits and ballooning debt are soon to be heard. The public debt would indeed rise if there is government borrowing as a matter of arithmetic. However, we need to pay more attention to the ratio of public debt to GDP. The debt to GDP ratio currently stands at over 80 per cent. Borrowing equivalent to 3 per cent of GDP (that is around £60 billion) would leave the debt to GDP ratio virtually unchanged if the growth of nominal GDP (that is including higher prices) was around 4 per cent. 

But, even if the debt ratio were to rise, there is no need to panic. Just ask the question – is the government expenditures on addressing climate change or inequality, socially and economically worthwhile? 

I saw a cartoon recently that perfectly conveys the point. It was drawn to be 20 years from now, and it shows someone surrounded by floods as a result of global warning saying, “well, at least the government doesn’t have any debt”. 
 
By Malcolm Sawyer, Emeritus Professor of Economics, University of Leeds.

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