Opinion: Why aren’t we borrowing more?

At the moment the yield on the UK’s five year government gilts is 1.65%. What this means in plain English is that if our government wanted to borrow £1,000 it would have to pay back £1,083 in five years.

In contrast, if you or I or a business went to the bank and ask to borrow the same amount for five years we’d be looking at paying back well over £1,500 by the end of the loan.

What this tells us is that our government can borrow money very, very cheaply. It can borrow it at less than the rate of inflation in fact.

So why isn’t the government borrowing more money?

I’m not talking about borrowing money for in order to pay for ordinary public spending. Public spending is already greater than the revenue the government has coming in.

What I’m talking about is borrowing money, at current rock bottom rates, for a large, one-off investment in infrastructure and other projects that can turn a profit.

For example, much needed investment in infrastructure (such as rolling out superfast broadband across the entire country) would not only boost economic growth and make us more competitive internationally but it would also act as a catalyst for further private sector investment.

And, in fact, the Centre for Economics and Business Research has calculated that that bringing substandard UK infrastructure up to scratch would boost GDP by 5% by 2026 and that every £1 billion invested in infrastructure increases GDP by £1.3 billion.

On these figures, borrowing £10 billion for five years to pay for one-off infrastructure investment would cost £11 billion to repay against an increase in government revenue (at 39% of GDP) of £25 billion over the same period.

The economic case for investment is therefore blindingly obvious.

The problem at the moment, however, is that the only government infrastructure investment so far has had to be paid for by cuts elsewhere. This is born of Osborne’s ideological obsession with refusing to allow the government to borrow a penny more than it absolutely has to.

But this is foolish. An innovative business in the same position the UK is in – that of having access to incredibly cheap credit – would find lots of ways to use that credit to make profitable investments. They’d do this because it makes good business sense! And there is no reason the UK shouldn’t do the same.

Borrowing to spend on projects that will make a profit (even something as simple as lending money to profitable businesses which the banks won’t lend too) might increase net public debt on paper in the short term but the pay back will make the borrowing deficit neutral and boost economic growth to boot through increasing consumer and business confidence and demand.

With Osborne as Chancellor this is never going to happen. That’s something we have to accept as being part and parcel of the coalition’s economic strategy.

But there’s no reason we have to follow that ‘Osbornomics’ economic strategy after the general election. In fact, we would be well advised to reject it as no longer necessary and build our own economic strategy around deficit neutral investment in infrastructure to fuel economic growth.

Unfortunately, policy motion F19 on the economy at this autumn’s party conference in Glasgow would commit us to Osborne’s spending and borrowing plans well into the next parliament. And that’s why I’ll be backing the SLF amendment to the motion.

We might be committed to Osbornomics for the duration of this coalition but it would be the height of foolishness, and bad business sense, to commit ourselves to it beyond then when we know that a much better economic alternative is available.

* George Potter is a Vice-Chair of the Social Liberal Forum and a campaigner for Guildford Liberal Democrats, writing in a personal capacity.

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22 Comments

  • Tired Liberal 27th Aug '13 - 2:40pm

    George is ignoring that revenue doesn’t accrue from infrastructure projects as they’re being built – it accrues afterwards. So the original borrowed £10bn would have to be refinanced at an unknown rate in 5yrs, not paid off with larger tax revenues.

    It’s much more sensible to think of the cost large infrastructure projects with the yield of 10 and 30yr bonds, which are higher.

  • Eddie Sammon 27th Aug '13 - 3:07pm

    The reason our interest rates are so low is largely due to quantitative easing, which involves the mass purchase of government bonds. Soon we will have to sell these bonds and when we do their price will drop and therefore our interest rates will rise. A situation where we have increasing debt and falling demand for government bonds could lead to a spike in interest rates.

    I am interested in more borrowing for investments, but only if we exit quantitative easing first. QE is clouding the situation and making economic analysis difficult. I’m also against QE anyway because I think it is cruel on fixed income pensioners.

  • Simon McGrath 27th Aug '13 - 3:17pm

    There are so many misunderstandings here that it is difficult to know where to start. The author tells us: ” An innovative business in the same position the UK is in – that of having access to incredibly cheap credit – would find lots of ways to use that credit to make profitable investments.” But business interest rates are also at a 200 year low and they are not, alas, investing nearly as much as we would like.

    There is also a fundemental assumption that the Government invests wisely – George mentions broadband – perhaps he should look at the history of the high speed broadband in South Yorkshire which has so far cost over £100m and signed up 3,000 customers

    http://www.publications.parliament.uk/pa/cm201314/cmgeneral/deleg7/130715/130715s01.htm

  • Paul Pettinger 27th Aug '13 - 3:40pm

    Your article reads as very sensible to me and has echoes with that of The Economist: http://www.economist.com/news/leaders/21580466-why-being-159th-best-investment-no-way-country-sustain-recovery-lets-try.

    The UK needs more investment one way or another.

  • Sadie Smith 27th Aug '13 - 4:07pm

    Maybe the question should be ‘ Why are we short of genuinely shovel-ready projects?’ these don’t have to be vast complicated things which take years to plan. A batch of schemes which could and would use the money the moment they got it would be more difficult to refuse.
    But I am equally irritated with businesses sitting on funds rather than using some of them, sort of ‘just in case’.

  • Nick T Nick Thornsby 27th Aug '13 - 4:19pm

    (I should point out that I discussed this piece with George prior to publication in my capacity as an LDV editor.)

    The problem I have with the arguments made here (and presumably by extension in the amendment talked about, though I haven’t seen it) is that it is not clear what the purpose of the proposed infrastructure spending is.

    There is an argument to be made that we should increase deficit spending on infrastructure in order to boost the economy. In sufficient quantity such spending would probably do so to some extent. There are well-known arguments as to whether that is desirable, but they are not made here. I suspect that is a reflection of the improving economic data, and the reduced desire among party members to shift economic strategy as shown in LDV’s latest polling (https://www.libdemvoice.org/lib-dem-members-views-on-economy-35568.html).

    But to then answer the question “Why more deficit-financed infrastructure spending?” with the answer “Because it’s cheap” seems to me to be a slight cop-out. Either you argue in favour spending the money to boost the economy, or you argue in favour of specific projects because they are desirable in themselves.

    Just briefly on the point about whether such spending can in theory be revenue-neutral, that is a claim that does not appear to be supported by research. Capital spending is generally reckoned to have a multiplier of about 1 (or slightly higher or lower) so it is an efficient way to boost the economy (if that is desirable), but even with that sort of multiplier the returns on the investment aren’t likely to make the investment cost neutral.

    And, as has been pointed out above, the returns are not likely to be quick enough that the government wouldn’t have to sell more gilts in five years time to finance the borrowing, so looking at the price of investing long-term it is highly likely to be significantly higher than the current unusual low.

    And finally on the point about having a distinctive economic policy: have I been reading a different motion to everybody else? The motion that we will debate could never have been written by Tories. There are arguments for it to be made even more distinctive (with more on free trade or mutuals) but I don’t see how increasing borrowing makes it any more distinctive or liberal.

  • Eddie Sammon 27th Aug '13 - 4:22pm

    George, I respect your endeavour to improve the economy, but there is no one-off situation to be taken advantage off. What I am saying is that interest-rates are artificially low because of quantitative easing, which means they aren’t really low. We are effectively paying for the “low” interest rates by permitting inflation.

    I am not saying the government shouldn’t invest if it finds a good investment that for some reason a private company won’t invest in, I am just saying we should not look at gilt yields and say “look at this magical situation we have found ourselves in, we must take advantage!”, that is Osbornonomics!

  • Simon McGrath 27th Aug '13 - 5:35pm

    George – UK Corporates have a huge cash pile – which they are not investing. They dont have to pay any interst on that ( but do of course have an opportunity cost). Nor are many firms having to pay 20% interest rate – look at the bond yields of medium sized corporates.

    By saying that the UK Goverment should borrow money to lend to UK firms you are assuming that they would do a better job of assessing risk than the banks. Given that one of the reasons for the crash was banks lending to people who could not afford to pay it back that seems a remarkably brave position to take – that civil servants will make better decisions.

  • I’m not sure what George is saying here.

    Is he saying that there are shovel ready projects that have a good economic rationale but are not happening because of lack of funding. If so, which ones are they? Because as far as I can see, there is already a whole load of investment being planned by the government, and much of the hold up is to do with planning more than anything else.

    Or is he saying that there is somehow a lack of demand in the economy ? Even with retail sales rising at 4% a year and employment levels rising rapidly, with an economy expanding at close to 3% a year.

    He also appears to assume that our very low borrowing rates would survive a government effectively jettisoning its commitment to short term deficit reduction. I’m not sure that is a safe assumption to make.

    I’m all in favour of infrastructure investment by the government, but it needs a long term approach, it has to be affordable and it has to have a rational economic case behind it, not just a blanket assertion that “it’s a good thing, so we must have more of it”.

  • George makes some very valied points, but Nick makes some good points. We should borrow more *for a purpose*. “Infrastructure” is vague to the point of meaninglessness.

    What should we be building, where should we be building it, and why should it be built?

    If I may answer my own question, I would strongly urge for investment in new homes. Our policy is to get Britain building 300,000 homes per year, but current construction levels are dire – just 107,000 homes were built in the last 12 months. We need to treble housebuilding.

    At the moment we are investing to build 38,000 houses per year. This isn’t enough. Britain has never built 300,000 houses per year without significant government investment. The private sector has never built more than 250,000 houses per year under the post-war planning system and the HBF industry lobbyists are clear that we won’t see construction return to these rates for at least 20 years. We can’t rely on the private sector to deliver.

    These houses should be built where they are most needed. These are primarily where affordability is the worst. We’re talking about major housebuilding projects for London, Bristol, Brighton, Oxford, Cambridge, Bournemouth, Reading and many other towns predominantly in the South and East of England (but not exclusively, e.g. York desperately needs a big housebuilding push). We also need far more homes in some rural areas such as Cornwall, Cumbria and the Home Counties, which should involve planning new towns in these regions.

    House prices are too high. Rents are too high. The high cost of housing means younger adults are struggling to get on in life. The news of rising house prices meant that housing has jumped up the Ipsos-Mori issues list by 7 pc pts in a month.Housing is being raised as a major issue by 5 times more people than transport, yet transport gets over 10 times more investment than housing.

    A detailed assessment at how to get to over 250,000 houses per year has been released by Shelter. We need to go further than this to meet our democratically agreed policy. http://england.shelter.org.uk/__data/assets/pdf_file/0011/689447/Solutions_for_the_housing_shortage_-_FINAL.pdf

  • Paul in Twickenham 27th Aug '13 - 6:20pm

    If all it took to have a vibrant economy was government infrastructure spending then surely Spain (rail and empty airports) and Portugal (loads of empty motorways) would be thriving. Spending needs to be targeted to productive ends that cannot be met through the private sector. I would not put broadband in that category. Now social housing, that’s a different matter.

  • Paul Pettinger 27th Aug '13 - 7:02pm

    Nick, you seem to have made George’s article more complex than warranted – his aim seems clear to me. Surely the argument is about where the balance of risk should lie, and on that basis where do you base the suggestion that capital spending is generally reckoned to have a multiplier of about 1? If that is true why spend anything on capital investment ever?
    The UK is in a recessionary period, so investing in infrastructure development (when there is a backlog) would not appear to present a risk of creating an inflationary spiral, but (when borrowing costs are low) instead offer the tax payer good value, increasing demand in the short term and (as long as it is well invested) supply in the long. As the Economist infers, the UK needs more investment one way or the other. Surely common sense also dictates that the Party should not be the only one supporting Coalition policy in 2015.

  • Andrew Suffield 27th Aug '13 - 7:59pm

    It’s very true that QE has artificially lowered bond yields and that eventually they will rise. But that, to me, is just another argument as to why we should take advantage of this one-off situation while we still can

    OK, there is a logical error here. I’m not going to engage with the policy question at all in this post, just why this idea is fundamentally flawed.

    The “bond yields” – the 1.65% rate that you’re quoting – is not a fixed value. It is not enshrined in legislation, it is not a contractual promise to offer bonds at that rate, or any such thing. It is instead the rate at which other people beyond our control are willing to finance the current level of UK borrowing. In short: it is a measurement of the status quo, not a promise for the future.

    We have no legal, moral, or rational basis to turn around and demand that any of those people finance an additional £10bn in borrowing at the same rate. It is highly implausible that the UK would be able to find anybody willing to lend it money at that rate if it went looking for that big a jump in borrowing.

    There is no “one-off situation to take advantage of” in this rate. This rate is what you get when you don’t do that.

    Predicting in advance the rate at which people would be willing to finance the kind of borrowing proposed here is somewhere between extremely hard and impossible; the argument between economists on this subject turns on whether they think that rate would be a little bit higher or a whole lot higher. I decline to comment on this question – but please, if you’re going to argue one way or the other, build an argument for it.

  • @Simon McGrath

    Your first sentence:
    “By saying that the UK Goverment should borrow money to lend to UK firms you are assuming that they would do a better job of assessing risk than the banks.”

    contradicts your second sentence:

    ” Given that one of the reasons for the crash was banks lending to people who could not afford to pay it back that seems a remarkably brave position to take – that civil servants will make better decisions.”

    Given the banks were spectacularly bad at assessing risk and in so doing caused the financial/economic crisis, why do you think that civil servants would be worse?

  • Daniel Henry 28th Aug '13 - 3:47pm

    Those of us that are “pro-borrowing” claim that certain investments will bring us a profit that is greater than the cost of borrowing. Those of us that are “anti-borrowing” claim it’s not that simple, that such projects aren’t easy

    I think the complaint from the “pro-borrowing” crowd is that Osbourne’s limit on spending is dogmatic, ruling out the possibility of funding these projects so discouraging people from even suggesting them.

    Perhaps the compromise is the following:
    “No cap on borrowing for any project with a strong business case that return on investment will outweigh the costs of borrowing”

    It would ensure that the funds were available for “invest to save” projects, give an incentive for people to develop plans for such projects but also have the safeguards in place to prevent wasteful spending.
    Surely that’s a line that would please everyone here?

  • Andrew Suffield 31st Aug '13 - 12:18am

    But right now growth is sluggish – it is still likely to be sluggish in 2015. It would make sense, and be possible, right now to stimulate growth through profitable investment in things that the country also needs.

    All of these points are trivially true and have never really been seriously disputed by anybody. The key question in the policy debate is whether or not the bond markets would be willing to lend us the money to do those things at a reasonable rate. We just don’t know, the economists disagree loudly, and it’s hard to predict. If you believe that they won’t (as Osbourne does and Labour apparently now agrees) then the government’s economic programme is the only realistic option. If you believe that they will, then obviously we have better alternatives available.

    But the key question here is whether or not such financing can be obtained, and if you don’t engage with that question then you aren’t really participating in the debate at all.

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