John McDonnell, Labour’s Maoist shadow chancellor, claims that he will throw up if he hears George Osborne utter one more time that he wants to “fix the roof when the sun is shining”. That might liven up Treasury questions a little, but, really, what’s Mr McDonnell’s problem? The chancellor is right to bang on about the roof. It’s never been cheaper to fix.
Energy and commodities prices are at decade lows. Iron ore is almost three quarters beneath its 2011 high of $190 a tonne. Copper prices have halved and oil is down two thirds since mid-2014. Inflation-adjusted wages are at 2004 levels, according to the Resolution Foundation, and borrowing the cash to pay the builders is a bargain, too. Interest on ten-year government debt is only 1.4 per cent, an all-time low. The chancellor could fix the roof, reinforce the foundations, redecorate and still have a few pennies left over to buy Mr McDonnell some Alka-Seltzer.
Apparently, there is another interpretation of the chancellor’s words in which the roof is a metaphor for the public finances. Of course, those need fixing, too. We don’t want to lumber our children with so much public debt that they end up paying for our spending binge. But really, that leaky roof — won’t it cost more to fix if it caves in and knocks out the top two floors in the process?
The chancellor’s calculations for the long-term public finances are based on the principle that by spending less today, the debt burden tomorrow falls. When it comes to infrastructure, the argument does not hold. Infrastructure has to be upgraded. As any homeowner knows, neglect the roof and the bill will be far worse when it collapses. The real trade-off that the chancellor has to make is between present and future costs.
In 2011, when the deficit was £134 billion (8.2 per cent of GDP), when China’s stimulus programme had pumped commodity prices up to record highs, when borrowing costs on ten-year government debt were still above 3 per cent, there was no option. Boosting infrastructure investment would have been taking a dangerous gamble with the public finances and sovereign credibility.
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With every meaningful input cost at decade lows, though, there’s no longer any justification for pulling back. If Mr Osborne really is worried about “loading debts on to our children that they can never hope to repay”, as he claims, he would be borrowing to invest today.
As Larry Summers, the former US treasury secretary, put it: “Debt is a burden on my children. So also is deferred maintenance, because it’s not like we’re going to let the infrastructure completely collapse.”
The chancellor has different ideas. In 2011, when infrastructure was a rip-off compared with today’s post-deflation world, spending on public projects amounted to 1.8 per cent of GDP. This year, it will be the same, around £36 billion in cash terms, before falling to 1.6 per cent in 2017 and 1.4 per cent for the subsequent two years. In 2018, national infrastructure will attract £5 billion less spending than this year. Adjust that for inflation and the figure looks even worse.
The chancellor can trumpet his roadbuilding programme, the biggest since the 1970s, but total spending is coming down for one reason alone — so that he can hit his inflexible goal of eliminating the deficit by the end of the parliament. The following year, spending is forecast to jump by £9 billion, almost a third.
It’s not as though Britain does not need to invest. According to the World Economic Forum, the UK ranks only 24th in the world on quality of infrastructure. Only Italy is worse in the G7. British infrastructure investment is low by international standards. Even at 2 per cent of GDP, a level last seen in 2012, it was half that of Canada, France and the United States. Privatisation may explain part of the shortfall, but include the private sector and the picture is the same. Total UK investment averaged just over 16 per cent of GDP in the four years to 2014, according to the World Bank. That compares with 24 per cent in Canada, 22 per cent in France, 21 per cent in Japan, 20 per cent in Germany, 19 per cent in the US and 18 per cent in Italy.
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There is no shortage of projects in Britain. The government has identified £460 billion of necessary work, from HS2 to the nuclear power reactor at Hinkley Point (the funding for which is being provided by the French and Chinese in a criminally expensive deal guaranteed by the British taxpayer, anyway).
What about the public finances? This coming year, Britain’s budget deficit is forecast to be 2.5 per cent, the lowest since 2002 and below the US, Japan and France. The government can even spend another 0.5 per cent, or £10 billion, without breaching European Union rules, for what that’s worth.
Theory holds that infrastructure spending is the closest economics comes to a free lunch. The chancellor is right to be suspicious, but, with costs so low, if the claim were ever to hold it would be now. Besides, the government’s official forecaster, the Office for Budget Responsibility, reckons that every 1 per cent of GDP spent of infrastructure spending generates 1 per cent of growth, through higher employment, skills retention and better productivity. Crank up spending on kit, then, and the OBR should leave its debt-to-GDP trajectory almost unchanged. That’s what matters for “our children”. What matters for the chancellor, on the other hand, is his fiscal rule and the OBR would declare him in breach.
A clamour is growing for governments to boost growth as negative interest rates prove central banks are running out of road. With GDP weakening and the deficit under pressure, the chancellor has hinted that he will cut spending in this month’s budget. He would have to be bold enough to scrap his target, but he has the fiscal headroom and the perfect conditions to try fixing the roof another way.
Philip Aldrick is Economics Editor of The Times