Fiscal hawks talk repeatedly and correctly about not expecting the next generation to pick up the tab for this generation's over borrowing. But there are other ways to cheat the next generation and one way is to fail to make the kind of year-by-year investment in roads, railways, airports and general R&D that underpin long-term prosperity.
Our children don’t deserve to inherit a country with second class infrastructure – not least because if infrastructure is allowed to decay that infrastructure cannot be rebuilt quickly. Failure to make adequate capital investment is especially inexcusable when interest rates are at historically low rates and it could be financed at minimal cost.
Britain’s Labour Party presented many silly policies at the May 2015 general election. The silliest policies involved suppressing the free market – including rent controls on private landlords and an energy price freeze. There was also the proposal to increase the top rate of income tax even though there was little evidence that it would produce extra revenue. It seemed to owe more to the politics of envy than a politics of equality or deficit reduction. But Labour did have one eminently sensible economic policy. Ed Balls, Labour’s Treasury spokesman, wanted to borrow more than David Cameron’s Conservatives for capital spending (investment in infrastructure). The policy generated little purchase from the electorate because voters didn’t believe the other key component of Labour’s fiscal policy – that it would achieve a surplus on the current budget (spending that covers day-to-day departmental costs, including wages, pensions and welfare benefits). Because Labour hadn’t supported any tough decisions during the 2010 to 2015 parliament it lacked the fiscal credibility to be trusted to borrow more for investment. With interest rates at historically low levels, however, Labour’s policy on borrowing to invest was the right one. The government could choose to borrow at 1.5% for the best part of two decades and it’s short-sighted that it does not.
US AND UK INFRASTRUCTURE IS NOT IN GOOD SHAPE
The major Anglo-Saxon capitalist economies simply aren’t spending enough on infrastructure. The United States, the home of capitalism, ranks 28th in global infrastructure spending and according to the American Society of Civil Engineers (ASCE) the cracks are beginning to show. The ASCE awarded the US an overall D+ grade. Solid waste management got a B- and bridges, ports, railways and public parks got a respectable C grade. Energy, transit, aviation, levees, dams, schools, roads, inland waterways, wastewater, hazardous waste and drinking water all got various D grades. The last time the US spent adequately on infrastructure was in the 1950s and 1960s. Since then public spending on infrastructure has declined to only half of the European average.
The UK – that other model of Anglo-Saxon capitalism – isn’t doing much better. Over the coming two to three decades £20 billion is needed to ensure British water systems cope with drought and increased population. £100 billion is required to electrify railways, improve mass urban transit, build roads and airports. Another £100 billion is needed for communications infrastructure, including broadband and smart metering. The biggest bill will be to deliver energy security. An estimated £250 billion will be needed by 2045 to keep the lights on and meet binding decarbonisation targets. Then there is the need to stabilise house prices by doubling annual housebuilding to something like 250,000 units per year – and support that extra housing with all appropriate transport, health and educational infrastructure.
The 2011 national infrastructure plan commissioned by George Osborne noted that the UK performed well compared to other OECD countries in coverage and cost of telecommunications and also in the reliability of electricity and gas supply. The same plan recognised, however, that many UK power stations were ageing, train punctuality was worse than in much of Europe, air capacity was a looming weakness and that road congestion was a growing problem. Fast forward to today and that airport decision is still to be taken. And addressing the House of Commons in his seventh budget as Chancellor in July 2015 George Osborne noted that the roads problem was particularly acute: “four fifths of all journeys in this country are by road, yet we rank behind Puerto Rico and Namibia in the quality of our network.” His source for this fact is the Global Competitiveness Report of the World Economic Forum. He continued: “In the last 25 years, France has built more than two and a half thousand miles of motorway – and we’ve built just 300.”
Unfortunately, despite Mr Osborne’s rhetoric, the problem has got worse since the great recession struck. Constantly wearing a hard hat and a hi-visibility jacket George Osborne wants to give the impression that this is a government that is rebuilding the nation’s infrastructure and a “Northern Powerhouse” in particular. Unfortunately, capital spending has been falling. From 2009 to 2014 capital spending was cut by about a third in inflation-adjusted terms; from about £57 billion per year to just £42 billion. Moreover Britain wasn’t starting from a particularly strong position. The latest declines in investment spending are only part of a much longer-term trend. The Institute for Fiscal Studies (Briefing Note BN43, August 2014) underlined the long-term decline in net government investment. From the mid-1950s to the mid 2010s current expenditure rose from 34.5% to 42.4%. Much of this increase is explained by the rising costs of pensions and healthcare; to the extent that that the NHS and welfare bills now account for more than half of all government expenditure. Over the same six decades investment spending fell by 50% to 65% depending upon which measures are used. Public sector net investment equals just 1.4% of GDP at the moment and isn’t projected to rise significantly during this parliament. At that percentage the British State is probably spending only half of what it ideally should be spending.
POLITICIANS SPEND TOO MUCH ON WELFARE AND TOO LITTLE ON INFRASTRUCTURE
If George Osborne does not want to take the borrowing-to-invest path – or can’t find ways of inducing corporates sat on huge cash piles to invest - he has other options and he has alighted upon cuts to welfare. “We’ve got 1 per cent of the world’s population,” he has said, “4 per cent of its GDP, but we undertake 7 per cent of the world’s welfare spending.” In that configuration he was channelling Angela Merkel and her memorable observation that Europe may account for only 7 per cent of the world’s inhabitants and a declining 25 per cent share of global GDP but it finances half of all social spending. Merkel and Osborne, two of Europe’s great advocates of austerity, agree that its future prosperity depends upon reducing benefit bills and affording better roads, railways and schools. When spending on welfare brings short-term political friends and spending on infrastructure only brings long-term economic gains you can understand why a democracy might lead to more of the first than the second kind of spending.
Welfare cuts may not be enough, however, to modernise infrastructure. Welfare cuts may not even be sufficient to eliminate Britain’s structural deficit – let alone afford a doubling of capital spending. Pensions and healthcare are the real drivers of increased government spending and they are squeezing out much possibility for George Osborne to increase capital spending and meet his controversial surplus target.
There is a particular problem of investment in science and technology. Whereas Israel, for example, spends roughly 4% of its national income on R&D (current and capital, public and private) Britain spends just 1.7% and the USA 2.7%.
Government can get infrastructure wrong by spending too much as well as too little, of course. China, it is said, is characterised by “thousands of empty cities, ghost airports and unfinished skyscrapers - investment in infrastructure that will never provide a return.” But democracies may be underinvesting because politicians don’t benefit quickly from spending on projects which only deliver long-term dividends. One solution might be greater use of earmarked taxes for infrastructure projects. America’s Centre for Transport Excellence found that infrastructure projects were approved 75% of the time when voters were consulted in ballot initiatives. This suggests that direct democracy might be a way of getting past the short-termism of politicians.
A DOMESDAY BOOK FOR THE TWENTY-FIRST CENTURY
One other key way of addressing the lack of investment in public infrastructure would be to embrace the ideas put forward by Dag Detter, a Fellow of the Legatum Institute, and Stefan Fölster in their new book “The Public Wealth of Nations: How Management of Public Assets Can Boost or Bust Economic Growth”. Their idea is as simple as it is potentially revolutionary and you might be as surprised as I am that it is not an idea that has not already been embraced: the idea that our governments put management of national assets (like urban space, forests, state-owned enterprises and the resources beneath publicly-owned land – like shale gas) in the hands of independent, transparently-run National Wealth Funds. The Funds would be free of day-to-day political interference and the expert NWF asset managers would be free to sweat the assets under their control to maximise public gain – but always within the context of social goals enshrined in their terms of reference. Singapore’s government-owned holding company Temasek – which has environmental and social objectives set in its charter - is probably the best model of what the authors hope other governments might embrace but, even within Europe, there is Austria’s Österreichische Industrieholding AG and, more recently, Finland’s Solidium.
Detter and Fölster’s key conclusion is that “the global total [of these assets] is twice the world’s total pension savings and ten times the total of all the sovereign wealth funds on the planet.” The exact sum they come up with of $75 trillion ($21 billion greater than the worldwide estimate of total public debt) may be a significant understatement because it does not include the assets of local and regional governments. “If professionally managed,” they continue the $75 trillion of assets “could generate an annual yield of $2.7 trillion, more than current global spending on infrastructure.” Even a 2% increase on the return of public assets could generate $1.5 trillion more for the public purse. The potential for increased return will vary wildly from one country to another. Countries like Brazil where assets such as Petrobas have been managed incompetently and corruptly in equal measure, will potentially have most to gain. Detter and Fölster claim that every percentage point of improvement on annual global portfolio returns would generate the equivalent of the GDP of Saudi Arabia. The percentage of public assets currently under expert management is estimated at just 1.5%.
Many countries are ill-equipped to set up National Wealth Funds because they do not even have a record of the assets they do own. Many countries, notably Greece, have no proper land registry. The authors estimate that only 7% of Greece has even been properly mapped. “Cash in the Attic” – published by the Adam Smith Institute two years ago – identified £40 billion of public assets within the UK that could be readily privatised but even countries like Britain and New Zealand which do have national asset valuation assessments “would most likely never have passed accountancy standards in a private sector company”. When I interviewed Dag Detter for the Legatum Institute I suggested countries needed to first prepare twenty-first century “Domesday Books” to correct this ignorance. Such catalogues could then allow the inevitable public debate on this idea to occur in the most informed possible way:
We have seen in Britain how the privatisation of some forestry land - and also moves towards fracking - have met huge public resistance. Although the authors are suggesting that national assets should be kept in public hands there will still be significant opposition to a more commercial use of environmentally-sensitive assets in particular – especially if cash-strapped governments set portfolio managers on paths that encourage short-term profit maximisation. The public debate about which assets can be “sweated” and on what criteria is likely to be an extended one. The Detter-Fölster approach is nonetheless potentially a richly rewarding one. The public may decide to give National Wealth Funds very limited powers and very limited portfolios at first but that does not preclude them growing over time if they start to build public confidence that commercial management is often a better route to environmental and social stewardship than managing public assets bureaucratically or not even managing them at all.
The new chair of the UK government’s National Infrastructure Commission – Lord Adonis – is an admirer of the ideas contained in The Public Wealth of Nations.
AND FOR LIGHT-ISH RELIEF
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