Category: Uncategorized

The National Wealth Fund has taken over the U.K. Infrastructure Bank, set up by the previous government. The new government is adding £5.8 bn in current plans to the £22 bn of inherited investment potential in the Infrastructure Bank and widening its remit and powers a bit. The Infrastructure  Bank lost £22 m in its last reported year, 2022-23.

The idea is to finance projects and ideas the private sector is nervous about, and to crowd in private finance to projects by putting up some of the capital or offering guarantees. Taxpayers should expect returns from these investments at a minimum to cover the taxpayer costs of borrowing all the money to put up the capital. Let us call that 4.5%. It would also be good to provide for capital repayment at say 3% a year. A private investor would clearly  expect  a risk or equity addition to the return, say at least 5%. That takes the total to 12.5%.

It seems unlikely the National Wealth Fund will aim for this. They may well be satisfied with a low single figure return, and may at least in early years run with more losses. They need to guard against being seen as the  last resort for high risk projects the private sector thinks will go under or as a first resort for a potential private sector consortium that sees the Fund as capable of absorbing risk through guarantees or high risk debt tranches which gives the private investors a less risky ride.

The state borrowing at 4.5% to invest in projects should ensure that the overall portfolio can avoid losses and pay for the borrowings.

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  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.

The new government’s policy to the NHS so far looks like the old one’s. Tell them getting waiting lists down is the priority, and then give them more money to do so.

There are to be new hospitals on capital account. Boris promised that but despite record funding little was completed and a lot was not started.What will be the change to get to construction contracts faster?

There is to be £1.5 bn of extra equipment. There always is a substantial equipment budget. A bit more might remove a few bottlenecks as people wait for tests.

The obvious think lacking is hospital beds or surgery small operations capacity. Of course beds need staffing, but the NHS is always recruiting extra staff.

There is some talk of the NHS making more use of private medical capacity as Blair and Milburn started. It is certainly a good idea to explore if the private sector could for example tackle a lot of cataract removals or knee joint repairs in dedicated facilities contracted to perform NHS work to a high standard. The patient would still be treated free.

There are some obvious money saving things to do to help bridge the gaps. Foreign visitors should pay for any use they need to make of the NHS, though that often does not happen.

The NHS should accept returns of equipment suitable after cleaning for reuse, like crutches  and frames. It should get better at controlling stocks and reducing wastage of foods and medicines.

 

 

 

I struck up a conversation on Thursday with a local entrepreneur who had set up a successful company. He had made his own way in the world without inherited wealth and now wanted a good future for his family.

He told me he had opened an office in Dubai and could use modern computing and communications to run it from there. As a result last week was to be his last week in the U.K. He decided his business and his family have a better future in Dubai.

When I asked him why, the tax and regulatory attacks of recent weeks were clearly the last straw. He felt the government does not value or want people like him in the U.K. In Dubai he finds a positive approach to business success, lower taxes and sensible regulations.

I hear on the media that there are many successful strivers thinking like this, and  hear Dubai is just one of several locations making a good pitch to attract U.K. business and talent.

The world does not owe us a living. We are not so full of entrepreneurial energy that we can deter and export it in large quantities. Many of the so called rich are hard working, providing the rest of us with goods and services we need. Who will provide all these if we attack self employment and small companies, overtax employment and take away profits and gains?

Amidst the many figures and forecasts in the March budget there was one that stood out which got too little attention. The Official figures said the Bank of England’s bond buying which had sent the Treasury £124 bn of profits in the early years will end in overall loss of £104 bn when they have finished their fire sale and run off of  the bonds. That is a hidden way of saying they plan to lose £228 bn on bonds. Taxpayers have so far had to stump up £49 bn of this loss by March 2024, with more big bills this year.

This whopping increase in public spending goes undiscussed in Parliament now I have stood down. The last Chancellor wrote a letter saying this is a real cost to the public sector which reduces scope for other spending and or leads to higher taxes. The Bank of England for its part denies that selling all these bonds at low prices is important to its monetary policy. It wants us to believe these sales do not depress bond prices and therefore push up interest rates. The time when they first announced a major programme of £ 80 bn of sales was the start of the big autumn 2022 bond sell off, when the news coincided with a rate hike and triggered the LDI problems.

No other Central Bank thinks it clever to incur big losses by selling bonds they paid too much for at depressed prices they help create by the sales. No other central Bank sends a huge bill to taxpayers. Why do we put up with this? Why do we pay the Governor more than £500,000 a year for being the world’s worst large scale bond trader, presenting us, the taxpayers, with a forecast £228 bn bill?

If the government wants to plunge us into more debt to support investments, it is vital those investments make profits and pay the interest on the debt.

The government needs strong guardrails to achieve this. In each case they need to ensure

1 Any private debt added to a partnership scheme is non recourse to the taxpayer

2. There is a clear stream of future revenue from the completed project that covers the interest on the debt more than twice

3. They should set a minimum target return of say 4% above inflation and explain how this can be reached in the Business case

4 Management should be on a low basic salary with substantial bonuses if profit and cash flow targets are hit

5. The interest on the extra state borrowing should be a charge on the project or company being financed.Dividends would only be paid to the state when appropriate.

6. The state would ensure all necessary permits and licences are available to the project, subject to them meeting the required standards.

Faced with charges of a borrowing splurge on so called capital investment the Treasury says there will be guard rails. They will not borrow all they will be allowed to under their new laxer rules. It would be more convincing if they told us how they choose the investments,how they will control them and what the actual borrowing limit is going to be.

The sad truth is the nationalised industries have  a dreadful record of unproductive and unprofitable investment. A very expensive Post Office computer system sent honest employees to prison and landed taxpayers with a large compensation bill. The Post Office has presented  taxpayers with accumulated losses of £799 million despite or because of the bad investment. HS 2, a nationalised railway, has been unable to deliver an important project to time or anywhere near budget. The project has had to be slimmed down losing its main point of going to the North of England. There will not be enough extra revenue to make a profit or pay the interest. The rest of the nationalised railway spends on capital only to need more subsidy and state support.

All the time roads are nationalised and paid for out of road taxes that greatly exceed road costs there is a case for further expansion and improvement in the network on state borrowing. Unfortunately this government so far has announced cuts in new road spending. Roads are crucial to our economic success as service providers and on line parcel deliveries come by van, ambulances drive to hospitals and trucks supply our factories by road.

There is no need for government investment into most energy projects. Customers are made to pay high prices for U.K. energy. If the government let the private sector make the investments we need in replacing imported LNG and building some additional gas turbine capacity we could boost growth and help lower world CO 2.

The government is right that we need to invest more. There is room for disagreement about what we need to invest in, and how much of it should be paid for by taxpayers.

The government’s current plans include the expensive and wasteful £20 bn for carbon capture and storage. They need to give greater priority to

New gas turbine electricity generators to keep the lights on and power new data centres

A fleet of smaller cheaper nuclear reactors

Several new reservoirs to ensure plentiful future supplies

New drainage pipes with more capacity

More domestic oil and gas to displace imports which produce more CO 2

More broadband and data processing capacity

More bypasses and dual carriageway strategic local roads

More motorway capacity

Digital signalling throughout the railway network to expand train capacity

Many of these projects can and should be privately financed.

The main problem with the Rachel Reeves idea that we can afford to borrow more in the public sector is it assumes the investments made by the state will produce income and profit and will be able to pay the interest and then repay the debt. Recent experience  says this is unlikely. HS2, a new nationalised railway is more than three times over budget, long delayed and little prospect of any revenue let alone profit anytime soon. The nationalised Post Office was given large sums to invest in new computers, only to send its innocent staff to prison and land taxpayers with a large compensation bill. The high spending nationalised railways as a whole lose large sums before subsidy and burden taxpayers with large debts.

Changing the way the debt control is calculated to allow more investment only works if all the investments make money after paying for the debt. If they turn out to be like the railways or the Post Office borrowing more means more debt, more burdens and higher taxes.

 

It is always better for governments and politicians to tackle problems they can do something about. Turning themselves into bad historians to posture about long past evils is pointless.

We can all condemn the eighteenth century slave trades. If we do it helps to remember not just the European slave traders that profited from evil, but also the African leaders who sold people to them. The Barbary pirates raided English towns and attacked English ships to enslave English people. We also need to remember the crucial role played in the nineteenth century by the U.K.  in abolishing much of the trade. The Royal Navy enforced new laws against it.

The problem with the past is it teems with slavery. The Romans relied on slaves  and enforced their imperial government on subject peoples like the English with a brutal army. The Normans killed our King and imposed serfdom on many English people, stealing the lands from their English owners. No one suggests these wrongs can or should be tackled by compensation or apologies.

The past is a foreign land no one can revisit. We can study it, learn from it and seek to understand it. We can also all agree slavery is wrong. That should lead us to tackle it now in our world.