Investments need to cover their costs and make a return

Labour have been good at abusing the word investment. Traditionally it refers to a decision to spend money on equipment or property that allows you to supply goods or services over a period years. This spend can be accounted for as capital spend, with building or equipment included as an asset in the balance sheet. If an enterprise spends more on employing people or on energy that is a running cost Ā to be included as a cost in annual accounts.

You can argue that spending on training or research is an investment as they may yield benefits in future years that add revenues.

If you do spend on capital items you often have to borrow to pay for them. You put both the value of the item and the loan to buy it on the balance sheet. Businesses expect to earn sufficient money by having an extra machine or a bigger building to be able to pay the interest on the loan to buy them, to repay the debt over a period of years and make a profit.

The government often makes investments that cannot do this. It may be good to build a replacement school but there will be no extra revenue to pay the interest on the debt or return a profit. Plenty of investments in free services paid for by taxes need some other way of appraising their contribution.

The state also makes investments that can and should be appraised like private sector investments. New railway lines need to generate new and additional rail revenue to justify their capital costs. Green investments by Great British Energy or the National Wealth Fund need to be cash generative. I will discuss how in a future blog.

24 Comments

  1. agricola
    November 1, 2024

    You, me and many contributors to this diary have personal hands on experiece of what an investment is. To the best of information I have, none of the current front bench have ever run anything designed to make a profit. Nor have they ever even had to make choices between competing services that would lead to the most effective way of achieving a goal. They cannot even accept that the market is best at deciding these things. They seem driven by thought that emmanates from around Islington dining tables, and therefore live in a possibly alchohol fueled fantasy world of political theory.

    Rachael Reeve has suddenly discovered that her budget is a one off surgical necessity, but killing the patient, so ensuring there is no sun dappled life in the future she is selling on day two of her disasterous budget. She is erroniously borrowing vast sums of money after her destructive tax increases. Day two is the verdict day when everyone affected realises her budget is a death sentence. The only discentor being the IMF with whom she will be generating a closer dependant relationship in years to come. For sure on wednesday she pressed the UK’s self destruct button, confirming that the lunatics are back in charge of the asylum.

    Reply
    1. Ian Wraggg
      November 1, 2024

      After announcing mega bungs for the NHS Streeting on tv yesterday said the money must be accompanied by reforms. Everyone knows you negotiate the reforms before handing over any money. Listening to him made me think just how naive this government was.
      Two tier, no idea Kier was on with his Dalek like performance
      He looks considerably unwell. I think both him and Thieves will be gone shortly. Then we will be subject to the nonesense of Crayons.
      What did we do to deserve this.

      Reply
    2. Lifelogic
      November 1, 2024

      Indeed a budget for growth (the destruction of) this after 14 years of fake-conservative anti-growth agenda. Somethings that certainly will produce no real return are HS2, Heatpumps, EV cars and vehicles (not even in saving CO2 not that that gives any benefit, net zero, abolition of. NonDoms, VAT on private school (what is needed is tax relief for them and more using them) investing in the NHS without sensible reforms (more going private is needed), the loans duff degrees circa 75% are, the war on landlords and farmers. Higher taxes deter investment and remove money from people who generally invest far better than governments do.

      ā€œInvestments need to cover their costs and make a returnā€ and often need to borrow and cover that interest too. It was the moronic Osborne who stopped full tax relief for landlords on interest – often taxing them at 100% plus.

      Reply
  2. David Andrews
    November 1, 2024

    Do Labour even understand the concept of needing to earn a return on an investment? Between them all government ministers appear to have little, if any, experience of setting up or running a business. The utter ineptitude of the tax on farms is clear evidence that they are clueless about farming. Miliband’s planned energy “investments” will only serve to make energy more expensive and reduce its capacity to provide security of supply. The extra taxes on jobs and businesses will reduce returns and stunt growth.

    Reply
    1. Mark B
      November 1, 2024

      The issue over the farms is, I believe, to do with HMRC. HMRC have, quite rightly, identified that wealthy people in order to avoid inheritance tax were buying up farms in order to pass onto their children and then sell on, with no or little tax paid, to HMRC. The amounts are small, much like they were when people were using limited companies to avoid paying ENIC and NIC via the use of dividends. Hence why we got IR35. Unfortunatly, it is a hammer to crack a nut approach and will cost HMRC, the government and the nation far more than they recieve.

      Reply
      1. R.Grange
        November 1, 2024

        There is also a trend towards institutional investors buying up farmland, especially in the US but now here as well.

        Reply
      2. David+L
        November 1, 2024

        The thought struck me that dealing a death blow to family farms would allow them to be swallowed up by the large corporate enterprises. I’m sure that these multi-national companies will be very grateful and the quality of our food supply will continue its decline. For instance, I have read so many warnings on the health issues with seed oils in our food, yet the area of rapeseed covering our arable land seems to be increasing.

        Reply
        1. Mark B
          November 1, 2024

          The thing about corporates is that, physically they cannot die. Yes they can go bankrupt etc. but if well run they can go on forever. They can also move from contry to country exploiting the most favourable tax regime and avoid inheritance or any other form of tax, hence why I said that HMRC and the government will get less as a result. They can also reduce supply thereby increasing scarcity and driving up cost, making larger and larger profits which then could be offshored to avoid further taxes.

          This is what you get when you put idiots in charge.

          Reply
      3. Lifelogic
        November 1, 2024

        The solution to this problem is the abolition of inheritance taxes and all capital taxes. All taxes should be a % of profits and income say 25%. That is more than enough to fund the few things needed from government. Plus money and investments would flood in to the country rather than out as currently.

        Reply
        1. Mark B
          November 1, 2024

          Agreed.

          Reply
    2. Peter Wood
      November 1, 2024

      Quite, as we all know, except apparently Milibrain and the front benches of BOTH sides of the House, Net Zero expenditure is an expense, NOT an investment. The best outcome for Milibrain’s spending would be to fund a couple of research grants, ONLY, in a few universities to look into innovative ways to use less carbon based energy.
      UK 10 year Gilt yield rising, costing more for government to borrow. So Ms Reeves debt binge is already kicking her sums into error.
      https://tradingeconomics.com/united-kingdom/government-bond-yield

      Reply
      1. Lifelogic
        November 1, 2024

        Well:-
        1. a bit more plant, crop and tree food is on balance a net good. Furthermore slightly warmer (and it is only slighty warmer) is a net good too.
        2. the thinks Milibrain pushed do not save CO2 anyway they just export it at best.
        3. Reducing CO2 worldwide is pointless & requires worldwide cooperation which will never happen.

        Good podcast this David Starkey Petter Whittle. On Jenerick and Kemi. But Kemi is surely home amd dry. Also on two tier Britain.

        Reply
    3. Lifelogic
      November 1, 2024

      For government – in the UK especially ā€œinvestmentā€ means piss down the drain or often crony capitalism – hose into you mates pockets, or your union supporters ones or pure corruption.

      People keep saying Sunak is a decent and honourable man as he steps down for Kemi in a day or two.

      Has he said sorry and corrected his ‘Unequivocally the Covid vaccines are safe’ statement to the house yet?
      Has he said sorry for his mad lockdowns, Covid loans and net harm vaccines that doubled the national debt?
      Has he said sorry for delivering us this appalling Government and even going six month early?
      Has he said sorry for relying on the MHRA largely funded by bigPharma as vaccine regulators?
      Has he said sorry to Liz Truss for blaming her and Kwasi for the inflation his and the BoE incompetent policies caused?

      Reply
  3. Mark B
    November 1, 2024

    Good morning.

    I do not know why Gordon Brown decided to change from spending to investments. Maybe it just sounded better and he wanted to give the impression that he was doing well for the country. In fact, what he was doing was circumnavigate EU spending rules (which we did not have to observe) by putting on ‘tick’. ie PPP, or Public Private Partnership. PPP Was first introduced by the Conservative government. It was designed to take the more risky parts of government spending and let private ventures take on the risk themselves. In return, they would receive money from the government for their use and, in some cases, would be able to purchase the project outright. It would cost more in the long run but, with so many of such projects going into overspend and over time costing far more, it was considered a necessary risk. A risk that was on a small scale. Labour under Gordon Brown massively expanded this in order to avoid large spending, borrowing and tax increases. Unfortunately he spent the money with the likes of the NHS and us, having to pick up the bill.

    I would therefore, regard that from taxpayersā€™ point of view, a very bad investment but a neat con trick.

    Reply I remember turning down Treasury suggestions of a PFI hospital project in Wales, successfully insisting on money from state borrowing as that was clearly cheaper.

    Reply
    1. Mark B
      November 1, 2024

      R to R

      Yes Sir John. PPI or PPP is not a bad thing. It has its advantages and uses. You just have to recognise them.

      Reply
  4. javelin
    November 1, 2024

    When a medical treatment goes into a ā€œroutineā€ phase it should be dealt with privately.

    So for example new glasses or regular ear wax removal.

    This also applies to handing out prescriptions, giving regular injections, performing standard operations, regular physio.

    Doctors should be used to investigate illness and prescribe a treatment.

    It would then be best for the patient and funding to go to the private sector to get a standard or regular treatment.

    Reply
    1. Ian Wraggg
      November 1, 2024

      Javelin that’s one of the most sensible things I’ve read in ages. It would reduce the NHS by over 50% and the private sector would have to tout for business. I’ve just had my cataracts done and it was quick, painless and effective. Not an outcome generally seen in the NHS.

      Reply
    2. Lifelogic
      November 1, 2024

      Best to use private sector doctors to just as they do for haircuts say Ā£40 for ten minutes with a GP. Same as works well for animals at VETs. With some provision for those few really without the ability to pay.

      Reply
  5. JayCee
    November 1, 2024

    At the heart of the issue here is public sector accounting. Unlike other entities, the Public Sector has not produced financial accounts that show a true P&L account and balance sheet. They have preferred to report simplistic cash accounting. Treasury budgeting does not allocate funds for long term projects separately from operating expenses. If you don’t spend it, you don’t get carry over.

    Reply There is very clear differentiation between current and capital spend in national accounts and there is a state balance sheet.

    Reply
  6. Donna
    November 1, 2024

    Labour has abused quite a number of words, not least the word “woman,” and the Not-a-Conservative-Party has either encouraged it by enthusiastically agreeing with them or meekly going along with it.

    Investments are intended to either generate a profit, or put in place the facilities necessary to generate a profit.

    None of the Tax and Borrow Squandering included in Reeve’s budget will generate a profit, or put in place the facilities necessary to generate a profit. HS2; the ridiculous windmills; the lunatic carbon capture and the rest of their “green schemes” will never deliver a profit ….. or at least, they will never deliver a profit for taxpayers although His Hypocritical Majesty of Windsor and many other billionaires expect to make a killing from them.

    Even the so-called investment in new school buildings fails to qualify. When money is hosed at public services it is intended to lead to IMPROVEMENTS in the building and/or service and in the long run MAY lead to efficiency savings, although that seldom seems to be the case.

    “Improvement” is a perfectly respectable word and would be a more honest description of what the Government is seeking to achieve. I recommend it to next Shadow Chancellor for the Not-a-Conservative-Party, since the current one (Jeremy Hunt) is basically a Socialist who is fully signed up to the abuse of language Labour deploys.

    Reply
  7. Lifelogic
    November 1, 2024

    To reply indeed PFI were absurd mainly just to pretend you were not borrowing so much when you were, in effect, jist borrowing and at higher costs and far less efficiently.

    ā€œInvestingā€ sounds better than ā€œpissing down the drainā€ but with government the latter is almost invariably far more accurate.

    Reply
  8. Narrow Shoulders
    November 1, 2024

    It could be argued that we are investing in legal immigration as these fine, upstanding arrivals will help drive our economy in years to come.

    That statement is as likely to be true as Rachel Reeves’ massive spending spree is going to generate a better, more prosperous country.

    It is not Government’s money. They have to take it off someone before they have any (latterly by excessive borrowing). Government should decide on its few priorities and get out of the way for the rest. Ā£35 billion for housing benefit? Ā£191 billion for NHS, Ā£41 billion for Scotland, Ā£17 billion for Wales.

    Reply
  9. Sir Joe Soap
    November 1, 2024

    Well you have to look at what the investment’s value is on the market, surely, to add it to the balance sheet. It is disingenuous to start adding in assets which can’t be sold. On the PL the cost of Repairs and Maintenance in this country boots it into loss. Much of training, education, health is a maintenance cost. Some R & D can be considered a speculative investment, but a business chewing up cash like the UK wouldn’t normally be able to afford any but the sure bet R and D.

    Reply
  10. Berkshire Alan
    November 1, 2024

    The Government have a track record of changing meanings.
    “Investment” for what is borrowing, and of late “Irregular” for what is Illegal.
    They seem to have never heard of the phrase “return on capital employed”
    I see it is being reported that the head of the new Value for Money Department, is being paid Ā£50,000 a year, for one day a week. !
    Just about sums it all up really, I wonder if they will work from home as well ?

    Reply

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