Should a Labour Government Borrow to Invest?
Martin Wolf, Financial Times 24.02.16: “Major governments are able to borrow at zero or even negative interest rates, long term. The austerity obsession, even when borrowing costs are so low, is lunatic.”
Last Friday Channel 4 News' FactCheck drew the links to an article headed ‘John McDonnell doesn't seem to understand how government debt works’. Andrew Neil repeated the claims over the weekend on BBC. This is quite a damaging allegation against a shadow finance minister.
The substance of the critique is that we (the nation) are too deep in debt to borrow any more money. We are told that interest payments on the national debt are £49bn. That sounds to you and me like a lot of money. If we borrow more surely interest payments will rise?
As John replied, it partly depends what we borrow for. He insisted that current spending should be paid for by current taxation.
- The whole point of investing is that you get back more than you put in.
- At present the government can borrow at about a 2% rate of interest. Inflation is currently 3%. Effectively that is free money.
- The Socialist Economic Bulletin calculates that the return on an investment such a building desperately needed housing stock will give a return of 10-12%.
- 2% cost to gain a return of 10-12%! Even Andrew Neil should be able to do the maths on that.
As Martin Wolf, chief economist at the Financial Times and a Commander of the British Empire, observes - in this situation NOT borrowing would be ‘lunatic’.
The need for infrastructural investment is there. Take ultrafast broadband. An EU report earlier this year showed the UK bottom of the league for the installation of Fibre to the Premises (FTTP) networks:
Yes, £49bn sounds like a lot of money. As 23 economists who replied to Andrew Neil, £9bn of this is owed by the Treasury to the Bank of England. This is like your left hand trouser pocket owing your right hand trouser pocket money.
The remaining £40bn is the same in constant prices as when the Tories left office in 1996/97. It is at a historically low level as a proportion of GDP.
The economy is currently recovering slower than the Eurozone economies, with productivity bumping along the bottom. This is largely because of Tory austerity.
Initially a Labour government would have to borrow more to stimulate the economy. As new jobs were created, right away tax would start to roll in – income tax, national insurance and VAT. This is a return on government investment that no private firm takes account of.
Public investment will make the economy grow faster and REDUCE interest payments on debt as a proportion of GDP.
In the longer term investments in programmes such as ultrafast broadband are the ONLY way to lift the economy out of its torpor.
The LRC does not believe British economy can be rejuvenated without major structural changes in addition to infrastructural investment. Labour needs instruments to control the pace and direction of economic growth. We advocate the nationalisation of the banks, for example.
To the question, ‘Should a Labour government borrow to invest?’ we reply, ‘Yes, it would be daft not to.’
- This article is intended as a rapid rebuttal, not a definitive statement.
- For the Socialist Economic Bulletin click here.