Ben Wray, in an article first published in The Herald , argues that new figures on the importance of public investment to the Scottish economy show the Chancellor’s anti-investment dogma is all wrong, and the Scottish Government should ramp up public investment to maximise its potential
HERE’S a sentence you are unlikely to hear from George Osborne in today’s Spending Review: “The UK Government will borrow more to increase public investment.” Borrowing is a term of abuse in the Treasury, and the words public and investment aren’t regularly put together either.
For our Chancellor, sound government means discipline in public finances, not direct intervention into the economy; and especially not through borrowing, which only increases the deficit and makes the country more vulnerable to economic shocks.
Or so the dogma goes. In reality, despite five and a half years into “the age of austerity”, October’s deficit figures were revealed to be the worst for six years, as a flatlining economy holds down tax revenues and increases welfare spending.
The likely response from Mr Osborne will be to double down on cuts in the spending review. And so the vicious circle of weak growth, weak tax revenue and cut-to-the-bone public services continues.
Contra Osbornomics, borrowing for long-term public investment in national infrastructure can significantly boost economic activity, creating jobs, raising productivity, increasing tax returns and reducing welfare spending, meaning healthier public finances.
SPICe found that “between a third and a half of overall GDP growth between Q2 2014 and Q2 2015 can be attributed to public housing and infrastructure investment.”
The Scottish Government’s investment in construction, on projects such as the new Forth Road Bridge, accounted for two thirds of all growth in the construction sector.
“SPICe found that ‘between a third and a half of overall GDP growth between Q2 2014 and Q2 2015 can be attributed to public housing and infrastructure investment.'”
The figures stand as testament to the Scottish Government’s rejection of Mr Osborne’s anti-investment ideology, and cut through the neo-liberal myth that government’s role in the economy is purely to create the best circumstances for private capital to do the heavy lifting.
Housing is a good example of the failure of “the market” to produce the goods. Housing supply has declined significantly in recent years, especially in private-sector builds and refurbishments, with only local authority housing rising steadily. That’s despite significant growth in the number of Scottish households, expected to increase by 21 per cent from 2008 to 2033.
In this sector, private capital has failed to deliver quality or meet demand, making public investment essential. The ability of government to borrow at lower rates, and at a scale and time period that allows for large long-term investment, makes it irresponsible for Scottish ministers to avoid the responsibility of tackling Scotland’s housing crisis through direct intervention.
The Scottish Government is likely to meet its five-year target of building 30,000 social houses by March 2016, but this is not going to meet the scale of the challenge. The First Minister’s new target of 50,000 homes (35,000 social, 15,000 private) still doesn’t match up to the fact that 500,000 new homes are needed just to keep pace in the next 25 years, according to Audit Scotland.
“Common Weal, in our recently published Book of Ideas, has proposed a number of ways Finance Minister John Swinney could escape the Treasury’s fiscal straitjacket and borrow to invest.”
Thinking bigger about public investment across all areas of the economy is imperative. Whereas Scottish Government investment has been in the millions, to get even close to eradicating the investment gap with other European countries it will need to be into the multiple billions.
The Scotland Act 2012 increased the Scottish Government’s capital borrowing limits to PS2.2 billion, with an annual budget of PS304 million. This is still way short of what is required.
Common Weal, in our recently published Book of Ideas , has proposed a number of ways Finance Minister John Swinney could escape the Treasury’s fiscal straitjacket and borrow to invest.
A national investment bank, capitalised by Scottish Government bonds, could leverage sums at least 10 times that of the capital borrowing budget.
A local development bank in every council area could use local authority pension funds – which run into the billions – to make long-term sustainable loans.
Special Purpose Vehicles could be established by the Scottish Government with other stakeholders such as housing associations and credit unions to lead investment in a particular industry, like housebuilding or district heating, borrowing from the national and local investment banks at low rates.
The notion that effective national infrastructure can be built any other way than government borrowing to invest is a chimera. Mr Osborne’s figments will survive the spending review but in Scotland we can move rapidly in a different direction, one which now has a proven track record of success.