THE government has announced more schemes to “stimulate” investment. We can now add Credit Enhancement and Export Finance Guarantees to previous measures like Funding for Lending, Credit Easing and the National Loans Guarantee Scheme.
Against the backdrop of a further growth forecast downgrade from the International Monetary Fund, the need to be seen to “do something” seems irresistible for the coalition. Since infrastructure is seen as a very good thing across the political spectrum, the Treasury team presumably felt they had nothing to lose by announcing the Credit Enhancement scheme to help “unlock” £40bn for infrastructure projects. Besides, the schemes will not be directly funded, but will entail guarantees against downside risks on a project-by-project basis. What could possibly go wrong?
For all intents and purposes, guarantees are just a means of piling potential liabilities for infrastructure projects off-balance sheet. Think of the Private Finance Initiative or the National Loans Guarantee Scheme. Last week, the Office for Budget Responsibility’s Fiscal Sustainability Report showed us what this really means – whereas the official public debt in 2010/11 was £905bn (60.5 per cent), the overall net liability for the same year was £1,195bn – 77.2 per cent of GDP, or over 150 per cent once you include the interventions made during the financial crisis.
The announcement of these schemes represents a shift away from Plan A, and is indicative of muddled government thinking and a failure to get the public finances under control. Real public expenditure fell just 2.2 per cent between 2009/10 and 2011/12. But current expenditure actually increased by 2.4 per cent – meaning it has been cuts to the investment budget on the spending side, along with tax hikes, which have reduced the deficit by a quarter so far. So we now have the prospect of the government, having cut the investment budget, guaranteeing the very same investments off-balance sheet.
Rather than dreaming up innovative ways of concealing new government debt, the government’s focus should be solely on raising our medium-term growth rate: taking measures to enhance productivity and improve our competitiveness. And yes, part of this requires reducing the size of the state by genuinely cutting spending.
Good infrastructure is, of course, necessary for growth. And that’s why the government should allow the private sector to undertake genuinely economic projects.
Most obvious here is a third runway at Heathrow, essential to maintaining a competitive hub in the UK. The private sector is ready and waiting to deliver, but political paralysis is likely to kick the can down the road until 2015 at the earliest, meaning lost trade and export opportunities. Likewise, the success of private sector road building and maintenance around the world shows a state monopoly of the road network is neither necessary nor desirable.
Though tempered by strict criteria, the government’s plan will instead provide public guarantees to projects which private investors currently consider too risky. We have been here before – see the state’s failed intervention in British Leyland in 1974. For this reason, they could well be economically damaging. The risk is that unwanted, inefficient infrastructure will then feed through to increases in damaging taxation for all of us, and higher bills for consumers – undermining any temporary employment boost. You only have to look at the decision to build HS2 (the planned high-speed railway), to subsidise wind-farms but no new nuclear plants, or the empty airport terminals in Spain, to see that governmental approaches to infrastructure investment are not always economically rigorous.
If the government really wants to improve the risk/reward ratio, then rather than underwriting questionable projects, it should look to the supply-side. Undo the planning laws and regulations which make good economic infrastructure projects unviable. Shape the tax system to acknowledge the role of risk-taking, and don’t penalise success. Stop picking winners in energy infrastructure, instead set a framework that allows the most economic infrastructure outcomes given energy cost and environmental ambitions.
A radical liberal agenda would have far more beneficial long-term outcomes than attempts to cajole funds into taking part in risky projects, with taxpayers taking the downside hit.
Ryan Bourne is head of economic research at the Centre for Policy Studies.