The gopvernment has a long wish list of new infrastructure projects. Some of the items on it are necessary and desirable. A few new power stations and some extra road capacity would be most welcome. Some of the dearest ideas, like HS2, are far more contentious. They have keen supporters, but also many strong critics claiming they are a waste of money.
As I have written before, it is a strange idea that any item of public spending classified as capital spending is now thought of as good. We are told it must be a good idea, because it creates jobs for the building industry, and offers us the prospect of returns in years to come. The trouble is, some of the public sector capital spending does not offer us future dividends but guarantees future public spending to service the debts and pay the running costs of the new facilities. It is not a good idea to agree to everything with the label of capital spending. We have to consider future affordability.
My view is the government’s £310 billion wish list is too big, and includes some projects that are not going to produce a sensible future return. Doubtless it will not all the built in a hurry anyway.It also excludes some other projects that could be good value and are needed.
The government has to ask itself how does it pay for all this? £310 billion is a large sum of money. Let’s look at it per head. It runs out at £5000 each for every man, woman and child in the UK.
We could raise this money in tax if the government decided to take over all the projects, or if private finance was difficult to come by.
We could borrow it for now, and then get people to pay extra taxes or user charges over a period to pay back the debt. This will be dearer than an immediate tax rise, but spread over a longer period. If the investment broke even people would pay around £10,000 extra tax or charges if it was borrowed for around 25 years. If the investments lose money or require susbisdy then taxpayers will end up paying a lot more.
The government could print the money and not aim to raise it through borrowing or taxes.
The government could borrow it but aim to inflate away some of the real cost of repayment.
None of these options sounds great. The last thing we need to day is higher taxes. Relying on more money printing or inflation is not a good call. Borrowing more when we have too much debt already has been ruled out by government rhetoric.
So what should be done?More of the necessary investment, like new energy capacity, and broadband, should be financed in the private sector and subject to a market test. That way we are more likely to get investments that add to our total wealth and income in years ahead, instead of cursing taxpayers with more tax and borrowing bills.
What new infrastructure do you want, and how should we pay for it?