Ben Wray, head of policy & research at Common Weal, takes apart the Taxpayers Alliance’ argument that it is “foolhardy” for the Scottish Government to borrow money, and makes the case for loosening the restrictions on Scottish Government borrowing
THE papers have presented it in a negative light . Taxpayers Scotland (the Scottish branch of the radically right-wing UK lobby group Taxpayers Alliance) have said that it is “foolhardy”. But the news that Scottish Government Finance Minister, John Swinney, is using the parliament’s new borrowing powers for infrastructure investment should be celebrated, and the case for much looser restrictions on its ability to borrow should be made. Here’s five reasons why.
1. Borrowing isn’t bad
One of the great fallacies to emerge out of the Great Recession is that borrowing is bad. Such economic illiteracy has informed George Osborne’s budget surplus law, which will make it illegal for the UK Government to run a deficit.
What this position fundamentally misunderstands is that money is debt. Banks create 97% of the money supply in the UK, and they do so simply by putting accounting entries into a computer that you see in your account. It is simply an IOU from the bank to you.
Therefore, when Osborne reduces the size of public debt and doesn’t grow the economy or increase exports to the rest of the world, he simply transfers public debt to private debt in the economy. This is what we’ve seen happen since the Great Recession, as private debt of companies and of individuals has risen sharply.
For governments, borrowing especially makes sense for big infrastructure projects that are expensive in the short term but pay for themselves over the long-run through increased economic activity, jobs and tax receipts. Bridges are one obvious example of major infrastructure investment that will usually involve borrowing, so is high speed broadband.
Another is borrowing where there is a direct return on the investment. Housing is an obvious example of this: borrowing to build council housing will (if done properly) pay for itself in rent returns over a 30-50 year period.
Because governments are huge entities, much bigger than any one company, lenders can be highly confident in their ability to pay the money back, and therefore they can borrow at low rates of interest.
Borrowing for capital investment built the NHS and millions of council homes after the Second World War. The only people it helps to depict borrowing in a purely negative light is the most exploitative lenders like commercial banks and pay-day loans companies who charge governments and individuals respectively with high rates of interest.
2. Low to negative interest rates
There has never been a better time for the Scottish Government to borrow. Why? Because UK Government gilts are at an all-time low (as the FT graph below shows) as investors look for a safe place to put their money as global financial turmoil increases, meaning it costs almost nothing at the moment for the Scottish Government to borrow money from the UK Government.
One-third of the world economy (including the likes of Japan and Sweden) has entered negative interest rates, meaning lenders in effect pay borrowers for borrowing from them. While the UK is not in negative interest rates yet, rates are at an all-time low and could go negative.
At a time when money is flooding out of the economy as investors get frightened about market trends, counter-cyclical government spending on infrastructure is more important than ever to boost economic activity. It just so happens to also be a time where it is incredibly cheap to do so.
To say that it is “foolhardy” for the Scottish Government to borrow money right now is either idiocy or mischief making.
3. Scotland’s investment deficit
Scotland has a major investment deficit – it invests less of its GDP in its future economic prosperity than the majority of EU economies.
This mainly because of the UK Government’s economic strategy which puts almost no emphasis on the role of government in economic development, especially in infrastructure as this World Bank graph shows.
Since the Tory-Liberal coalition came to power in 2010, the Scottish Government has seen its capital budget fall from about 3.4% of GDP in 2010 to 1.4% today. That is a steep decline in the ability of the Scottish Government to invest in infrastructure, and makes using its new capital borrowing powers (limited though they are) absolutely imperative.
The importance of Scottish Government infrastructure investment can’t be underestimated. A report by the Scottish Parliament Information Centre showed that between a third and a half of all Scottish economic growth in 2014 can be accounted for by Scottish Government infrastructure investment.
There is an obvious link between a government that invests in the country’s infrastructure and productivity: if workers that have jobs that require regular internet usage can’t access high-quality internet access due to poor digital infrastructure they are not going to be able to do their jobs as efficiently or effectively. If community wind farm enterprises have poor access to an outdated grid system they are less likely to be able to maximise their energy supply.
Britain has one of the poorest productivity rates in the whole of Europe, as the graph above reveals. It’s so bad they have given it a name: “the productivity puzzle”. Except it is not really a puzzle: if we invested more in workers skills and in the country’s infrastructure productivity would rise.
5. Scottish sovereignty
Finally, the Scottish Government has more limited powers to borrow for investment than just about any country in the world. (Other than perhaps Greece, which has given up many of the powers of a modern nation-state because of its debt servitude to the Troika.)
The Treasury has restricted borrowing for investment to just 10% of the Scottish Government’s capital budget per year – PS328m in total for 2016/17. That’s less than 0.2% of GDP; a tiny figure in comparison to other countries.
Even local authorities have powers to borrow money well in excess of the Scottish Government. Treasury borrowing restrictions should be loosened substantially. Any country with a whiff of sovereignty would be able to borrow to invest to shape its economic future. Scotland should be no different.