It is now fashionable to say that the UK economy needs more capital spending in general, and more public capital spending in particular. The one area where both the outgoing Labour government and the Coalition government did decide to cut was capital spending. Both now think they need to abate these cuts.
It is always advisable where there is an establishment consensus in the UK to probe it. It is often wrong. The establishment combined to recommend the ERM, and to claim the benefits of belonging to the EU as designed by centralisers on the continent. So how well have they thought through public capital spending?
The first thing to recognise is there are various types of capital spending. Let us identify four:
1. Spending to put in new facilities and to open new services – “growth” spending. E.g. HS2, to provide a new faster train service to Birmingham from London.
2. Spending to extend existing services to cope for increasing demand – as with new schools or hospitals in busy areas, often coping with the increase in population E.g. new primary schools in Wokingham
3. Replacement capital – new schools or rebuilt roads to replace existing capacity
4. Investment in labour or energy saving or other productivity enhancing improvements in service delivery.
More of type four, cost reducing and productivity enhancing investment in the provision of public services could be a very good idea. It helps to bring the deficit down over time, assuming a decent return on the investment made through cost saving.
Type one is clearly incompatible with bringing the deficit down. Anything which increases the future current spending of the government through offering new or additional service makes it more difficult to control the deficit..
Type two also swells the deficit. Controlling migration better would reduce the need for such expenditures. Having more success than the previous government in fostering private sector led recovery outside London and the South east would also help, as it would reduce the need for internal migration and extra facilities in the hard pressed south.
Type 3 spending can be helpful. It should be allied with type four, so that the replacement facilities can be run more effectively and cheaply.
All capital spending boosts total UK output, as most of the money is spent on UK building and construction work, and provides jobs for people who have to be based in the UK to carry them out. There will be imported elements in the building supplies consumed, where UK industry could probably do better at import substitution given favourable circumstances for industrial expansion here.
Those who simply urge more capital spending should recognise that some is good and some is unhelpful when it comes to curbing the deficit. Schemes with high future running costs for the state are not helpful. It is most important that new capital concentrates on doing things better and more effectively to help control running costs. Privately financed capital projects with no recourse to the taxpayer to pick up the losses would be most welcome to use some of the slack in the building industry.
I wish all my readers a happy and prosperous new year.