The Coalition government has some sympathy with the idea that the public sector needs to boost its own capital investment. The Chancellor has made modest increases to the inherited much cut plans. He does not do more, because he says if he undertook to borrow more markets might lose faith in his fiscal management. If markets drove up the cost of state borrowing, that will take demand out of the economy as interest rates generally rise. That not only hits borrowers, but also undermines confidence and knocks business. It would of course offer some offset as savers had more to spend.
I think there is a larger problem with rolling out big public sector capital programmes. So often the projects the public sector chooses fail to raise productivity but instead gives the state large new future liabilities. The state has to maintain and staff the new buildings and pay the often large losses on the trading assets acquired. The UK is not competitive enough. It needs to raise productivity. It needs to have an affordable public sector. The wrong kinds of public “investment” can make these aims more difficult to achieve.
Some might think, for example, that a new library would be a welcome project. The state then has to provide tax revenue to pay all the future running costs of the library for many years, as it will not bring in any revenue. Meanwhile it leaves open the question of how and when will the UK adapt to the new technology of the web and ebooks. Some believe that HS2 is a crucial economic project that can open up business to the North. However the business plans show it will be heavily loss making and struggle to attract enough passengers. It is twentieth century technology, when China is pressing on with maglev, and the US with its digital revolution allowing good communcations from remote locations.
It seems unlikely that the state can come up quickly with a series of projects that could raise productivity in the state sector, thereby boosting growth and helping reduce future costs of state provision. Short of that it is difficult to see how an enhanced public sector capital programme will lift us out of low growth. Japan has tried this for many years, and just ended up with even more massive state debts than we have. Tomorrow we will consider a larger privately financed capital programme. This has the advantage that the projects need to meet commercial tests, and do not lumber taxpayers with any failures.