If you call spending “infrastructure” or ” investment” it gives a magic halo to it in the UK debate. Mr Brown was well aware of this. He called much government current spending “investment” as he sought to reassure people that his fast growing state financed by big increases in debt was sustainable and desirable. If it was all “investment” it implied there would be a pay back, that we need not worry about the debts.
The difference between investment or capital spending and current spending is clear in many cases. Building new school buildings is capital spending, because those buildings will be available to the public sector for their educational purpose for many years after the money has been spent. Conversely paying the teachers’ salaries is current spending, because this month’s pay only buys this month’s teaching. Next year you will need to pay them next year’s pay. Mr Brown called teachers’ and lecturers pay an “investment” in the future of the young people they were teaching, which is true. That does make the spending capital or investment spending in the normal sense.
In the private sector the difference between capital spending and current spending is central to the compilation of company accounts. There the difference is clearer. Capital or investment spending is different and necessary. It is spending on the plant and equipment you need to make future goods. There is a profit or cash return on it. Successful investment allows you to make and sell more goods to people bringing in more cash and profit to your business.
Capital spending can be for growth. You add extra factory space and equipment because you need to make more. It can be for better efficiency. You replace obsolete plant with more modern, which allows you to produce goods that are better and cheaper. It can be replacement. Your old machines are worn out. These different reasons produce different answers in terms of how much extra cash and profit the investment will generate relative to its costs.
It can be different in the public sector. Much capital expenditure yields no extra revenue or profit. A new office building for the civil service is usually just an extra cost, though it may be desirable or necessary. A new High speed train will add more to the costs of the railway than it will add to the revenues, increasing the need for current subsidy. An extra or new school may be welcome, but it too simply increases the costs of educational provision by the interest on the extra debt.
The problem with public capital provision is how you allocate capital between the different sectors in the absence of a popularity or profit test from the market. Free enterprise companies can decide easily to put more capital investment into supplying ipads than into supplying record players, because that is what the market demands. The car industry can decide to spend more capital on expanding production lines for popular cars and shutting down lines for the unpopular ones. In government there is no accepted measurement of the relative popularity of a new road or railway line for potential users, and many other issues crowd in to complicate such a decision.
The outgoing Labour government decided to slash public capital spending to start to get the deficit down. The Coalition only reinstated a modest proportion of the cuts.Now it is popular to say we need more public capital spending to stimulate the economy. We need to be careful about such slogans. White elephant public sector projects, borrowing huge sums for projects that are going to be very costly and not very popular with users, is not a good idea for a heavily indebted country to embark on. I will look in a later post at what is sensible by way of a capital programme.