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| How on earth would Labour raise £500bn for its infrastructure spending? | How on earth would Labour raise £500bn for its infrastructure spending? |
| (35 minutes later) | |
| Jeremy Corbyn and John McDonnell at the Labour conference this week have trumpeted plans for £500bn of investment in infrastructure under a future Labour government. | Jeremy Corbyn and John McDonnell at the Labour conference this week have trumpeted plans for £500bn of investment in infrastructure under a future Labour government. |
| And the economics author Paul Mason, who is close to the Labour leadership although he does not officially speak for the party, said on Sky News yesterday: “We can borrow it. And if we can’t borrow it we’ll print it”. The claim prompted the former shadow Chancellor, Chris Leslie, who was sitting next to Mason in the Sky studio, to wince as if in pain. | |
| No, which makes Mason’s claim a bit odd. In July McDonnell outlined plans to “mobilise” £500bn in infrastructure spending. He said this would be comprised of £250bn of government capital spending over 10 years and £100bn of state investment in a new publicly owned national investment bank and a new network of regional state-owned banks. | |
| These banks would then borrow from the private capital markets to turn the £100bn of government capital into £250bn of lending to infrastructure projects. | These banks would then borrow from the private capital markets to turn the £100bn of government capital into £250bn of lending to infrastructure projects. |
| Not necessarily – or at least not all of it. The £250bn of direct capital spending would be spread over 10 years. So that’s £25bn a year, which is actually less than the roughly £80bn of gross public sector investment (£32bn excluding capital depreciation) that the Conservatives are currently forecast to spend in 2019-20. | Not necessarily – or at least not all of it. The £250bn of direct capital spending would be spread over 10 years. So that’s £25bn a year, which is actually less than the roughly £80bn of gross public sector investment (£32bn excluding capital depreciation) that the Conservatives are currently forecast to spend in 2019-20. |
| However, if the state’s budget deficit is not zero when Labour implemented this plan and they also tried to capitalise the new national infrastructure bank relatively rapidly then, yes, they would probably have to borrow from the capital markets by issuing new government bonds, or Gilts. | However, if the state’s budget deficit is not zero when Labour implemented this plan and they also tried to capitalise the new national infrastructure bank relatively rapidly then, yes, they would probably have to borrow from the capital markets by issuing new government bonds, or Gilts. |
| Not really. The Government's own national infrastructure plan identifies £483bn worth of projects that need investment by 2021, including massive new road, rail, sewage, housing and broadband investments. | Not really. The Government's own national infrastructure plan identifies £483bn worth of projects that need investment by 2021, including massive new road, rail, sewage, housing and broadband investments. |
| Many economists – including bodies such as the International Monetary Fund – argue that the UK has under-invested in infrastructure in recent decades. | Many economists – including bodies such as the International Monetary Fund – argue that the UK has under-invested in infrastructure in recent decades. |
| And there’s the context of deep cuts to government infrastructure spending under George Osborne’s austerity. | And there’s the context of deep cuts to government infrastructure spending under George Osborne’s austerity. |
| Public sector net investment was slashed 42 per cent in real terms in just four years. It fell from 3.4 per cent of GDP in 2009-10 to just 1.8 per cent in 2013-14. | Public sector net investment was slashed 42 per cent in real terms in just four years. It fell from 3.4 per cent of GDP in 2009-10 to just 1.8 per cent in 2013-14. |
| And as the Financial Times' economics writer Martin Sandbu has pointed out, if overall investment in our economy (both public and private) had continued to rise on the pre-2010 trend the level would today be considerably higher. | And as the Financial Times' economics writer Martin Sandbu has pointed out, if overall investment in our economy (both public and private) had continued to rise on the pre-2010 trend the level would today be considerably higher. |
| That implies a major investment gap has opened up. And some economists suspect that gap is one of the reasons our productivity performance has been so poor in recent years. | That implies a major investment gap has opened up. And some economists suspect that gap is one of the reasons our productivity performance has been so poor in recent years. |
| The independence of the Bank of England. There is no signal from the capital markets that investors are unwilling to buy government debt. In fact, the Government’s 10 year borrowing costs are currently close to all-time lows. | The independence of the Bank of England. There is no signal from the capital markets that investors are unwilling to buy government debt. In fact, the Government’s 10 year borrowing costs are currently close to all-time lows. |
| Yet some still argue that could rapidly change if a new Labour government came to power and that investors could suddenly refuse to lend to the British state except at penal rates. | Yet some still argue that could rapidly change if a new Labour government came to power and that investors could suddenly refuse to lend to the British state except at penal rates. |
| Paul Mason saying that under such circumstances “we’ll print it” implies that Labour would be willing to ignore the central bank’s independence and order the Bank of England to print the money that the government wanted to spend on infrastructure. | Paul Mason saying that under such circumstances “we’ll print it” implies that Labour would be willing to ignore the central bank’s independence and order the Bank of England to print the money that the government wanted to spend on infrastructure. |
| That would potentially mean the end of the central bank’s independence, which is widely seen as a fundamental pillar of UK economic stability. | That would potentially mean the end of the central bank’s independence, which is widely seen as a fundamental pillar of UK economic stability. |
| And if politicians are ordering the central bank to print money that could also mean they will go too far and cause a damaging surge of inflation, further undermining investor confidence in the UK. | And if politicians are ordering the central bank to print money that could also mean they will go too far and cause a damaging surge of inflation, further undermining investor confidence in the UK. |
| John McDonnell and Jeremy Corbyn have said they would respect the Bank's operational independence. But comments like those of Mason throw that committment into question. | John McDonnell and Jeremy Corbyn have said they would respect the Bank's operational independence. But comments like those of Mason throw that committment into question. |
| They are. The argument is that Quantitative Easing (a fancy name for money printing) would be more effective if spent on real economy assets like infrastructure, rather than government bonds. | They are. The argument is that Quantitative Easing (a fancy name for money printing) would be more effective if spent on real economy assets like infrastructure, rather than government bonds. |
| And there is a sense in which the Bank of England is even moving in this direction. | And there is a sense in which the Bank of England is even moving in this direction. |
| In its latest £70bn round of QE launched in August to help the economy in the wake of the Brexit vote the Bank said it would buy £10bn of the debt of major companies – something that it had previously resisted doing. | In its latest £70bn round of QE launched in August to help the economy in the wake of the Brexit vote the Bank said it would buy £10bn of the debt of major companies – something that it had previously resisted doing. |
| Some say that the Bank could buy special government infrastructure bonds, or the bonds of new banks, like Labour’s planned national infrastructure bank, which fund such projects. | Some say that the Bank could buy special government infrastructure bonds, or the bonds of new banks, like Labour’s planned national infrastructure bank, which fund such projects. |
| It could be. Many people think of helicopter money as central banks giving away newly-printed money to households to spend in order to boost spending and growth when interest rates cannot go any lower and there is the threat of deflation. | It could be. Many people think of helicopter money as central banks giving away newly-printed money to households to spend in order to boost spending and growth when interest rates cannot go any lower and there is the threat of deflation. |
| But another variant is saying money will be printed to finance a certain element of government expenditure – such as infrastructure spending – rather than the government raising debt to pay for it. | But another variant is saying money will be printed to finance a certain element of government expenditure – such as infrastructure spending – rather than the government raising debt to pay for it. |
| This might have been what Paul Mason was thinking of when he made his remarks. | This might have been what Paul Mason was thinking of when he made his remarks. |
| Whatever its economic merits, the deployment of helicopter money would constitute a profound change in the role of the Bank of England and would require extremely close co-operation with the Government. The terms of engagement would need to be very clearly set out. | Whatever its economic merits, the deployment of helicopter money would constitute a profound change in the role of the Bank of England and would require extremely close co-operation with the Government. The terms of engagement would need to be very clearly set out. |
| There would also be a problem if the Government was in favour of the plan but the Governor of the Bank of England and its Monetary Policy Committee were opposed to the mechanism or did not believe the stimulus was necessary. | There would also be a problem if the Government was in favour of the plan but the Governor of the Bank of England and its Monetary Policy Committee were opposed to the mechanism or did not believe the stimulus was necessary. |
| The vexed issue of the Bank’s independence would inevitably arise. | The vexed issue of the Bank’s independence would inevitably arise. |
| The case in favour of this, as made by economists such as Adair Turner, a former chair of the Financial Services Authority, is that it would boost demand in the economy at a time of weakness (and when interest rates can fall no further) but without creating more government debt. | The case in favour of this, as made by economists such as Adair Turner, a former chair of the Financial Services Authority, is that it would boost demand in the economy at a time of weakness (and when interest rates can fall no further) but without creating more government debt. |
| Some critics, however, argue it would be simpler and more transparent for the Government to just fund the necessary infrastructure spending by raising debt. | Some critics, however, argue it would be simpler and more transparent for the Government to just fund the necessary infrastructure spending by raising debt. |
| Others say that helicopter money would probably be a slippery slope down into the valley of runaway inflation - especially if done by politicians at a time when the economy was not at serious risk of a deflationary recession or stagnation. | Others say that helicopter money would probably be a slippery slope down into the valley of runaway inflation - especially if done by politicians at a time when the economy was not at serious risk of a deflationary recession or stagnation. |
| UPDATE | UPDATE |
| Paul Mason has clafiried on Twitter that what he was advocating in regard to printing money was not Labour policy (though he wishes it was). | |
| Paul says he wants to keep the Bank of England operationally independent but "overtly politicise its mandate" or "take political control of monetary policy". | Paul says he wants to keep the Bank of England operationally independent but "overtly politicise its mandate" or "take political control of monetary policy". |
| He points to his lecture in April 2016 as a broader exposition of his thinking on monetary/fiscal policy: | |