This is another leaked letter from Dame Lucy Doolittle, Director of the unit for co-ordinating cross cutting initiatives and partnerships to Dr Roy Spendlove, Miscellaneous Projects.
I am writing to ask you to take up the task of developing an infrastructure programme. I know you were very concerned when the previous government decided to cut capital expenditure. You argued at the time that it would remove jobs from the construction industry and harm prospects of recovery. I understand you were disappointed when the Coalition government was only prepared to reinstate a small proportion of the cuts in their first budget plans in the summer of 2010.
I have been involved in a series of high level cross departmental discussions including the Treasury to try to reinstate some of the lost projects. Ministers have come to see the importance of rail, road, energy and water investment. They have even been prepared to reconsider their objections to more London airport capacity. They have now asked us to come up with imaginative ways of financing these projects, so they can have the advantage of the stimulus to activity, without the spending scoring against the public debt as traditionally defined.
I appreciate your expertise in this area, as I remember you did a lot of work for the previous government in the areas of PFI and PPP. This time round we should also bring into consideration the new more flexible relationships with a couple of banks that have large state shareholdings. We can consider what use can be made of the government’s current ability to borrow at cheap rates, thanks to quantitative easing. There are new precedents in the form of Credit Easing, Quantitative Easing and the new mortgage scheme. The latest £20 billion National Loan Guarantee Scheme, for example, does not raise an additional contingent liability on the Treasury, as it is scored under the old Bank of England asset purchase facility. We have been able to argue that it is merely a transfer from the Bank’s ring fenced asset purchases with Treasury guarantee to a direct Treasury balance sheet guarantee. The full inclusion of the Royal Mail Pension fund allows us to credit the assets in a helpful way for the current deficit, while allowing long term amortisation of the liability.
I would also like you to widen the work to consider the role and future of quantitaive easing. Whilst the Bank has the lead on this, it does require consent from the Treasury. Given our co-ordinating role in this important infrastructure work, I think we need to be ready to argue the case about the future size of the programme and the uses it can be put to. The Bank’s use is narrow, confined almost wholly to buying government debt in the secondary market. Whilst this has the welcome effect of keeping government borrowing rates down, it does not necessarily help the rest of the economy as much as it might. I think we need a way of having more control over the spending of the money created. You appreciate the sensitivities in how this can be described and presented.
We see the European Central Bank has approached it differently and lends three year money to commercial banks, who in turn can then lend to governments or high quality companies. Maybe we need to suggest that the Bank of England should widen out its activities, as it could make our task much easier in finding the money for these programmes.