Yesterday the Prime Minister talked about the right thing at the CBI – how does the UK sustain its current recovery and speed its growth. Readers of this website will know that the government’s whole economic policy is based on achieving and sustaining above trend growth for four years, starting next year. It is the growth that brings in the massive extra tax revenue, which in turn brings down the deficit. No growth, no extra taxes. No extra taxes, much extra borrowing.
The main point in the Prime Minister’s address which offered the prospect of better performamce was his wish to see a £200 billion infrastructure investment programme over the four years, largely financed by private capital. We do need more and better broadband, more rail and road capacity, and more energy generation. Putting this in boosts the economy of itself, and provides better conditions for other businesses to expand. If you want a manufacturing revival you need good transport for raw materials, components and finished goods, and plenty of reasonably priced energy.
Some others have mentioned the Green Investment Bank as crucial to accelerating growth. This is costed at just £1 billion.If they spent the £1 billion over a four year period, it needs to be compared in scale to the £6 trillion of economic output we can look forward to over the four years. The Green Investment Bank would account for just 0.02% of output. If they gear the bank, lending ten times as much as the £1 billion of starting capita. it still only amounts to 0.17%. Of course if it had a way of backing winners it could make a welcome contribution, but we need to remember the significant figures.
The truth is the economy needs to mobilise large sums for investment and for exports to achieve the sustainable growth the government seeks.To do this we need the large banks with trillion pound balance sheets, not just those with billion pound balance sheets, to have money to lend to worthwhile projects. It might be possible to exceed the PM’s sensible wish for an extra £200 billion of infrastruture investment. To raise such sums we need to allow the banks to lend on that scale.
The good news is the money is available from past quantitative easing and from recent profits for the banks to lend the extra needed each year for a good programme of infrastructure investment. We do not need any more QE, or any more public spending to bnring it about. We do need a change of regulation for the banks to allow them to place more sensbile risk on their balance sheets so they can lend the money needed for the new projects.