Leaked letter about infrastructure finance

 This is another  leaked  letter from Dame Lucy Doolittle, Director of the unit for co-ordinating cross cutting initiatives and partnerships to Dr Roy Spendlove, Miscellaneous Projects.

          Dear Roy,

                          I am writing to ask you to take up the task of developing an infrastructure programme. I know you were very concerned when the previous government decided to cut capital expenditure. You argued at the time that it would remove jobs from the construction industry and harm prospects of recovery. I understand you were disappointed when the Coalition government was only prepared to reinstate a small proportion of the cuts in their first budget plans in the summer of 2010.

                            I have been involved in a series of high level cross departmental discussions including  the Treasury to   try to reinstate some of the lost projects. Ministers have come to see the importance of rail, road, energy and water investment. They have even been prepared to reconsider their objections to more London airport capacity. They have now asked us to come up with imaginative ways of financing these projects, so they can have the advantage of the stimulus to activity, without the spending scoring against the public debt as traditionally defined.

¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† I appreciate your expertise in this area, as I remember you did a lot¬†of work for the previous government¬† in the areas of PFI and PPP. This time round we should also bring into consideration the new more flexible relationships with a couple¬†of banks that have large state shareholdings. We can consider what use can be made of the government’s current ability to borrow at cheap rates, thanks to quantitative easing.¬† There are new precedents in the form of Credit Easing, Quantitative Easing and the new mortgage scheme. The latest ¬£20 billion ¬†National Loan Guarantee Scheme, for example, does not raise an additional contingent liability on the Treasury, as it is scored under the old Bank of England asset purchase facility. We have been able to argue that it is merely a transfer from the Bank’s ring fenced asset purchases with Treasury guarantee to a direct Treasury balance sheet guarantee. The full inclusion of the Royal Mail Pension fund allows us to credit the assets in a helpful way for the current deficit, while allowing long term amortisation of the liability.

¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬†¬† I would also like you to widen the work to consider the role and future of quantitaive easing. Whilst the Bank has the lead on this, it does require consent from the Treasury. Given our co-ordinating role in this important infrastructure work, I think we need to be ready to argue the case about the future size of the programme and the uses it can be put to. The Bank’s use is narrow, confined almost wholly to buying government debt in the secondary market. Whilst this has the welcome effect of keeping government borrowing rates down, it does not necessarily help the rest of the economy as¬† much as it might. I think we need a way¬†of having more control over the ¬†spending of ¬†the money created. You appreciate the sensitivities in how this can be described and presented.

                     We see the European Central Bank has approached it differently and lends three year money to commercial banks, who in turn can then lend to governments or high quality companies. Maybe we need to suggest that the Bank of England should widen out its activities, as it could make our task much easier in finding the money for these programmes.

Yours ever




  1. lifelogic
    March 21, 2012

    The main thing destroying jobs in constructions is the lack of (or high cost/restrictive terms) of bank lending for property development and investment. The best use of the government’s low borrowing cost would be so get fund through to SMEs who have many good projects on hold due to a lack of normal banking and an entirely sensible lack of confidence in Cameron’s sense of direction.

    It seems we are to have 7% stamp duty over £2M which is clearly absurd as indeed most turnover taxes are. I assume Osbourne wants to stop properties ever changing hands for some reason. If so little tax will thus be raised anyway and it will be anti-growth as indeed are most of his other policies.

    45% is still far too high. Why on earth is Osbourne so keen to kill UK growth. Perhaps he has decided (as Brown seemed to at the last election) that as he failed to do anything sensible in the first two years – it is thus too late & the next one is already lost. Therefore, perhaps, the bigger the mess he leaves for Labour the better it will be for Cameron/Osbourne’s “soft europhile, socialist party” in 2020.

    1. lifelogic
      March 21, 2012

      Osbourne in the budget just now today claimed that “Aggressive tax avoidance is morally repugnant”. On the contrary it all depends on what one does with the tax thus avoided.

      It is not after all hard to use it better than the government does (perhaps by a factor of about ten or so with ease). The government wastes so much of the money they grab off tax payers on green tosh, HS2, loans to the PIGIS to prop up the dis-functional EURO, the feckless, the dis-functional NHS, poor education systems, inconveniencing tax payers with silly rules & regulations, and the like.

      That surely, Mr Osbourne, is what is truly immoral – his governments policy of tax, borrow, waste, over regulate, kill real jobs and kill real growth.

      Also keeping the 50% in place for two years for pathetic political reasons, when you must have known all along that it raises little and destroys jobs, that is truly immoral.

      At least he did not seem to mug private sector pensioners again but 45% is still far too high. What about is IHT (cast iron) £1M promise? I assume he will do this just before he loses the next election and it is then reversed by labour.

      1. lifelogic
        March 21, 2012

        I see the 45% seems to be only starting from April next year I quote:- “So from April next year, the top rate of tax will be 45p. No Chancellor can justify a tax rate that damages our economy and raises next to nothing. It is as simple as that.”

        So why has Osbourne kept it in place for two years and now wants yet one more? Why, even then, only take it down to 45% – it is idiotic. The General anti-avoidance (few details as yet) also seem very likely to push yet more good people and high taxpayers abroad and destroy jobs.

        In short loads more tax increases that will damage growth still further and little attempt to balance the budget or reduce government waste & wasteful spending. Lots of silly misguided infrastructure and “green” energy plans

        The only really bright note was how useless Ed Milliband seemed in his pathetic reply.

        1. StevenL
          March 21, 2012

          I’m not sure what makes people think that ‘principals based’ ‘tax avoidance’ laws will prevent sharp practices with respect to tax.

          Do ‘principals based’ ‘data protection’ laws prevent sharp practices with respect to personal data?

          Do ‘principals based’ ‘consumer protection’ laws prevent sharp practices with respect to consumers?

        2. Caterpillar
          March 21, 2012

          No doubt we’ll read JR’s opinions tomorrow.

          The change to 45% is symptomatic of an eventually mentality – and perhaps playing with the timing of cashflows.

          (w.r.t. ‘eventaully’) What I cannot believe is that after two years in Govt it is only now that there is some indication of future simplification. Corporate and income tax levels heading towards each other, consulting on cash based accounting for small businesses, possibly seeing NI going etc … and yet at the moment we see NI and income tax having different thresholds. Why simplification has been so slow and remains jam tomorrow is beyond me.

          (It also remains horrifying to me that the Chancellor has continued to pursue a high inflation policy and not sufficiently lent on the MPC. Inflation above 2% restricts real growth – this is ECB research – and yet there are still at least two MPC members that wish to expand QE and none voting to end ZIRP, while inflation is still high.)

    2. uanime5
      March 21, 2012

      45% is much too low and won’t have any effect on growth. Lowering corporation tax will stimulate the economy far more than giving the wealthy tax cuts.

    3. StevenL
      March 21, 2012


      You mention lending to SME’s a lot, but are you really convinced that looser capital requirements would lead to more of this as opposed to just looser consumer credit and mortgages?

      As I understand it, lending to SME’s is hard work. Whereas mortgage lending is easy, with HQ-dictated tick box approval processes. Is it not possibly the case that lending to SME’s has in fact been crowded out by the British addiction to land price speculation?

      Surely a free market in planning permission and legislation providing for long term transferable tenancies would be the silver bullet as far as construction goes? I really do think it’s a case of real growth or high land prices and the ponzi-esque ‘property ladder’ delusion. Not both.

      1. lifelogic
        March 22, 2012

        Property prices are determined by supply and demand and are a reflection of peoples wealth. New supply of houses is expensive in both Land and build costs. If we want lower prices we have to either decrease the population/demand or increase the supply by relaxing planning and building more. Not everyone can live in a large house in say Chelsea and price is the mechanism to control who lives there.

        At the moment businesses cannot borrow sufficient at sensible rates even with good property as secondary security. Looser regulation on sme lending is needed it is clearly now far too tight and expensive to generate jobs and growth.

        1. StevenL
          March 22, 2012

          Land without planning permission, and subject to restrictive planning policies is cheap Рless than £1k a plot in the south east. The average build cost of a family home is circa £80k to £100k.

          It’s the scarcity of the planning permission which adds the ¬£250k+ to the price – and adds to the amount of debt consumers need to take on to buy a home – thus crowding out employers like your good self.

  2. Mike Stallard
    March 21, 2012

    “finding the money for these programmes.”

    Underlying this noble thought is the assumption that money “invested” in “infrastructure projects” will somehow trickle down into the local economies. Radio 4 last night proved that many of these infrastructure projects – Crossrail, Scottish bridges and so on are, in fact, actually built by foreign companies with, of course, foreign labour.

    They do not actually benefit local people at all, while at the same time they put a lot of them out of work, usually permanently (e.g. Bombardier).

    Only by interpreting the EU rules in an imaginative way can local people (and that means local government) get any benefit from infrastructure projects.

    1. lifelogic
      March 21, 2012

      Indeed many of these infrastructure projects are ways of spending say £10 billion on something of true value perhaps £2 billion. In the case of HS2 and wind power & other totally mad schemes, the true value is perhaps less than 10% of the costs. The other 90% is thus wasted and causes countless jobs in the real economy to be lost. This by diverting investments and good people into doing totally the wrong things. High and over complex taxes and over regulation does this too. Let us hope Osbourne has worked this out and does something sensible for a change today.

      1. Bazman
        March 24, 2012

        What would be a good infatuctue project in your opinion? Water? Roads? Railways? Power. What? More tax cuts? We are not a tin pot island trying to become a tax haven.

  3. Brian Tomkinson
    March 21, 2012

    “The full inclusion of the Royal Mail Pension fund allows us to credit the assets in a helpful way for the current deficit, while allowing long term amortisation of the liability.”
    This is just a form of fiddling the books and passing the liabilities on to future generations. As I wrote yesterday, no company now would be allowed to behave in such a manner and nor should the government. The ghost of Robert Maxwell is alive and well in Downing Street.
    If the deficit can be reduced so easily, what incentive is there for the real reductions in spending which were required to bring the budget back into balance and then start to pay off the debt? How long before all state contributory pension funds are so treated? The government should cut its spending not find ways of impoverishing future generations. Government Ponzi schemes should be made illegal.

  4. oldtimer
    March 21, 2012

    Perhaps Dr Spendlove`s department shoud be renamed from Miscellaneous Projects to Department of Financial Fiddles. To keep all above board, this change should be sold as coming under the government`s modernisation programme.

  5. Atlas
    March 21, 2012

    I wonder how future historians will summarise the last few years. Will it be as a time when countries such as the UK started to find that they were unable to do things they needed to do because they was in the EU?

    People make great claims about the advantages of the EU’s ‘open market’, but those advantages certainly come with disadvantages as well. Eventually something in this increasingly stressed system will give – perhaps the fate of Western Roman Empire shows the way – especially given the EU’s pretention to be a re-creation of said Empire.

    Certainly debased currency played a big role in the departure of Rome, so the Dame and the Dr. are playing out an embrace of death.

    1. Atlas
      March 21, 2012

      Typo: For ‘ they was’ please read ‘they were’.

    2. uanime5
      March 21, 2012

      The Western Roman Empire collapsed because most of the economy was in the Eastern Roman Empire. So they lacked money, reduced the quality of their armies, then their empire was conquered by barbarians or splintered into pieces.

    3. Disaffected
      March 21, 2012

      The EU saw the budget before it was presented, I emphasise presented, by Osborne in parliament.

      So QE was, and is, being used to take £74 billion from pensioners, as well as keeping interest rates at a historic low. This is not enough, so he is going to take another £3billion from them. On the positive front welfare lifers get a 5.2% pay rise in a weeks time. I thought this was meant to be a budget for working families??

      I hope all the pensioners remember how the socialist Clegg, Cable, Cameron and Osborne helped them in 2014 Eu elections and 2015 general election.

      I thought Osborne was a bit quiet on the structural deficit front that he made so much fuss about previously- has he given up on that theme? No courage to stop spending cuts?? Come back Gordon, at least you could do key stage 2 maths!!

      1. Bill
        March 22, 2012

        No. Don’t come back Gordon. Please stay in obscurity. ‘No more boom and bust’ – I remember it well.

  6. Denis Cooper
    March 21, 2012

    I’m not clear how the new National Loan Guarantee Scheme fits in with the Bank of England Asset Purchase Facility.

    There was a Credit Guarantee Scheme, but apparently no operations were conducted and it was shut down in November 2010:


    In more detail:

    “The Credit Guarantee Scheme Facility gave the Bank of England the option to purchase bonds issued by banks under HMG’s Credit Guarantee Scheme (CGS). To gauge market conditions, the Bank engaged in regular dialogue with intermediaries and also consulted with issuers and investors. As it was not deemed necessary to activate this facility, on 15 November 2010 the Bank announced the withdrawal of the CGS Bond Secondary Market Scheme.”

  7. RDM
    March 21, 2012

    Could the BoE underwrite a 10yrs+ issue from a private development bank, or at least start the process?

    Isn’t that what it comes down too?

  8. RDM
    March 21, 2012

    Mike Stallard, I believe you are correct, but only too a point.

    What we really need is to focus on building growth from the bottom up. We need many more Banks to finance startups, and support our own infrastructure company’s to take Risks, taking on the Projects themselves! The BoE needs to get the QE to these new Banks!

    1. lifelogic
      March 21, 2012

      The start-ups will only survive if the huge, over bearing, state sector does not kill them off. They need to cut the state sector down to a sensible size relative to the private sector it feeds off. Osbourne has totally failed to do this.

      1. RDM
        March 22, 2012

        Seems like a start of a cunning plan! ?

        Now can I have a loan for a startup?

      2. Bazman
        March 24, 2012

        That would of course involve cutting a private sector that feed of a state sector. A downward spiral could ensue. A spiral you would not be a part of in your tax haven. Ram it.

  9. Derek Emery
    March 21, 2012

    Will there ever be any financial payback from an infrastructure project or will it always make a loss?
    Projects take many years and are always over-budget and late. If HS2 costs optimistically £20 billion and borrowed at 5% would mean a profit of £1 billion/year and this would never pay back the capital.

    This is equivalent to £2.7 million per day profit. That means selling 27,000 £100 tickets every day if ticket sales were pure profit. Assume the running costs are only 50% of sales it means having to sell 54,000 £100 tickets per pay back interest charges. Assuming the capital is paid off at 5% pa the number of tickets sold will have to double to 108,000 at £100 each. If you had 100 trains/day each would have to take 108o passengers on average. Pendolino trains carry 600 passengers maximum so more realistically there would need to be 180 trains/day or 90/day in each direction all bang full every 16 minutes.

    Is it realistic that the public would ever anyway nearly get their money back?

  10. javelin
    March 21, 2012

    The EZ problems look like they are starting to return (now that Greece has defaulted). Greece WILL default again. Portugla looks like it is on the hook. Spain is now benig sucked into the mess (courtesy of housing and Portugese bonds), and the derivatives in Italy are starting to come to the fore.

    The real issue is that all the asserts in the EZ banking system have been handed over to the ECB. The EZ banks are now maxed out on collateral for debt – even the junk for the LTRO . There will be no LTRO3.

    Further the real problems lie in the PIGGS (esp Italian and Spanish) repo derivatives that remain largely off balance sheet and hidden beneath the water.

  11. Bob
    March 21, 2012

    Just listening to R4 headlines.

    +++ Labour have criticised Osbornes budget. +++

    Nothing about the Pope’s religious faith (etc)

  12. BobE
    March 21, 2012

    I quote.
    David Cameron 2010
    “It is fundamental to my values that people who have worked hard all their lives, and are now drawing their pension, deserve to be treated with respect. So that is what you will get from any government I lead. We will make sure that older and retired people get the dignity and quality of life they deserve.”

    So why drop the tax free sum Dave?

    1. A David H
      March 22, 2012

      Perhaps he is not leading the government.

  13. uanime5
    March 21, 2012

    Regarding the budget it seems the Osborne has decided to raise personal income which will benefit almost everyone, lower the 40% tax rate threshold to ¬£32,245 which will squeeze those on middle incomes, and lower the 50% tax rate to 45% which will only benefit the richest 1%. If he continues like this eventually we’ll have a 40% flat tax.

    Quick question for all the economists out there according to the Laffer Curve how much will lowering the 50% tax rate to 45% raise in tax revenues? If you’re unable to calculate this then it’s highly likely that the Laffer Curve doesn’t work.

    On a positive note Osborne’s plan to reduce corporation tax is actually likely to help the economy because it will encourage more companies to invest in the UK. The bank tax is also a good way to raise additional revenue.

    Other things in the budget are that pensions will be reduced by about £3billion, so expect this to go down badly with the elderly.

    Also the Government’s NHS reforms have passed so expect medical care to be performed by the cheapest provider and rationing to become more common.

    1. uanime5
      March 21, 2012

      I also found an interesting letter that I though I’d share with everyone.

      Our governments are fond of telling us that we risk the “wealth diverters” leaving the country if we tax them like the rest of us. Is it true? Consider a move to the USA (specifically New York) where, according to the politicians, wealthy individuals are treated more leniently than here. Certainly the maximum income tax rate is 35 per cent, which is lower than ours, but this is only federal income tax and ignores the state income tax and the city income tax, together amounting to around 12.62 per cent in New York (with no special rate for capital gains) ‚Äď a total not too different from ours.

      Try “non-dom” status. It doesn’t exist in the US and if they catch you quietly exporting your profits to the Cayman Islands this is tax evasion, with a $25,000 fine and a five-year prison sentence for each year that you do it. Ouch! It’s why there are continual squabbles between the US and Switzerland about secret numbered accounts.

      How about the property tax on your ¬£10m house? ‚Äď sell up here and buy a similarly valued one in the US. Your annual tax will go from ¬£2,000 a year here (Band H) to between 1.5 and 2.25 per cent of value, depending on where you live, which comes out at ¬£150,000 to ¬£225,000 a year.

      Having spent most of my working life in the US, I could fill a page with the various stealth taxes imposed by different government bodies. The wealth diverters won’t leave, because the UK is a prime tax haven for the wealthy.

      John Day


      1. lifelogic
        March 22, 2012

        London is indeed quite a good place (tax wise) for the rich say the £10m+ people to be if they are nondoms especially with the new General anti-avoidance rule. Not very good it they are UK dom. If that is the case they should perhaps become nondom in Dublin or go to a tax haven or Switzerland.

        1. Bazman
          March 24, 2012

          We will do what they do with their employees and see what happens. If they do leave then we should revert back. Why should a nation of millions be held to ransom. As many a manager has told me ” We don’t respond to threats” Neither do I.

  14. BobE
    March 21, 2012

    George Osborne‚Äôs ‚Äėgranny tax‚Äô in the form of the abolition of the Age Related Allowance has created uproar among older Britons.
    For many older people the abolition of the age-related allowance for over 65s, and the freeze on tax allowances, will be seen as a tax by stealth on their already stretched finances.
    The damage to the Government of being seen to raid pensioners’ allowances to pay for a cut in the top rate of income tax might do considerable political damage.
    Pensioners have votes.

    1. Bill
      March 22, 2012

      I imagine the political calculation was that the old age population would not change the voting practices of a lifetime and that therefore Osborne was pretty save to trim their incomes. The Conservatives would still vote Conservatives and nothing would induce the grey Labour vote to ditch Miliband and co.

      I may be out of touch but a loss of less than 300 pounds per year does not seem much to me.

      1. Bill
        March 22, 2012

        for ‘save’ read ‘safe’.

  15. BobE
    March 21, 2012

    Do ‚Äėprincipals based‚Äô ‚Äėparking‚Äô laws prevent sharp practices with respect to parking?

  16. Adam Collyer
    March 21, 2012

    Dear Lucy

    Thank you for your letter about infrastructure investment proposals. Your suggestions align perfectly with the thinking here at Miscellaneous Projects. As you know, we are very keen to expand the role of Government in deciding where Britain’s money is spent. After all, the real economy consists of spending. Activities like production and saving are pretty ephemeral, as Lord Keynes himself showed all those years ago. Unless we have a national plan to decide how Britain’s money should be spent, the people might get ridiculous ideas about deciding that for themselves! The consequences could be most unfortunate.

    We were of course concerned in the early days of the new Government that they might be keen to reduce the level of State involvement in the economy. Thankfully, that appears not to be the case, and we have been most encouraged to see them taking up the baton of pointless spending with such enthusiasm.

    Although they have used that unpleasant term “austerity”, it is now clear they meant austerity for the public, and not spending cuts. I don’t need to remind you that tax increases only hit the private sector, while spending cuts might hurt the real economy here in the public sector.

    Against this background, Miscellaneous Projects have indeed been working on proposals for new infrastructure investment. I do think there is a problem of terminology here. We have been successful over the last few years in persuading the public to accept that all State spending is “investment”. We now find ourselves in the difficult situation of trying to explain that some investment is investment whereas other investment is consumption. Perhaps we are trying too hard, and our aim should be more to confuse than explain.

    I will welcome the opportunity to work closely with colleagues such as yourself to work up in more detail our proposals for spending more. We both know how vital it is to stop the private sector grabbing Britain’s resources. None of us want to return to the bad old days, when it was taken for granted that private citizens and companies should be able to spend more than half of the national income!

    Yours truly


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