Fiscal rules OK

The balanced budget rule which says spending on  current  budgets has to be covered by tax income is sensible and prudent. Whilst education is an investment in young people, teachers’ pay is still a current and recurring item of spending.

Some of you are concerned that the government can borrow to invest. Investment means the capital budget where you buy items like new school buildings or a new road which will be used for many years going forward. Most investment in the state sector is building and construction work.

The Balanced budget rule still provides a constraint on how many new buildings you can build to expand a free to the user service, as all the staff and running costs of the new buildings fall on current account under the Balanced budget rule. It does encourage investment in replacement buildings that are more fuel efficient and in other ways cheaper to run or public investments that generate a revenue return.

In order to justify borrowing to invest we need to show the need for the new capital provision and the imputed return where it is for a service provided free to the user. Let us take the case of the M25. This expensive motorway offers no direct financial return to the taxpayers who paid for it, because we do  not have road charging. If we had put in place a road charge system instead of the current Vehicle Excise duties and fuel duties, the M25 would have shown a great return for the state investor. The state has to impute a value to the likely use of the facility to assess one public sector project against another. By definition this can only be a judgement based on  stated assumptions. The state also has to take into account that use is likely to be higher because it is provided free.

In the case of borrowing to provide a new school the case is overwhelming where there are more pupils than school places in a local area. If it is a replacement school then the project needs to show substantial running cost savings compared to the building it is replacing, and preferably a return of capital to the state from disposal of the one it is replacing unless on the same site.

A new railway line is easier to assess, as the railways do collect money from train users. Spending a lot of money on a  heavily loss making line would not  be a wise investment.

Somehow the state has to improve its way of evaluating all these competing projects to come up with a list that genuinely expands the national wealth or are essential to the delivery of good quality public service like health and education.

 

52 Comments

  1. Mark B
    November 10, 2019

    Good morning.

    I am sorry Sir John but I disagree with your arguments.

    Investment : The action or process of investing money for profit.

    The term investment came into government parlance with the then Chancellor, Gordon Brown. It was used to disguise what previously, and quite rightly, been described as spending. Labour need to change the language to distance itself from the profligacy of past Labour governments.

    The analogy of the M25 not collecting monies is false. Road Tax, although put into general government spending, is stated that it collected for the building and the maintenance of such. We also have toll roads, bridges and tunnels.

    The savings that any project makes are not given back to the taxpayer but, are absorbed into and by government and used elsewhere. ie I do not get a tax rebate when the energy efficiency of school is increased. All that happens is the money is saved and spent on other things. Therefore, I cannot be considered an investor since I have not right of return and, therefore, the term investment is wrong.

    Reply I understand your viewpoint but convention does distinguish between public capital spending and revenue spending. Labour did misuse language by calling much current public spending an investment, which it is not under accounting definitions.

    1. Sir Joe Soap
      November 10, 2019

      I agree with Mark. Investment is s misnomer and this is really spending for perceived future public good.

      1. Hope
        November 10, 2019

        Prescott wastefully spent £500 million on PFI fire brigade communication HQs around the country still empty still being paid for! We have an empty one in a nearby town costing about £5,000 pw to be empty! Investment my foot. Local authorities investment schemes through our taxes and govt approval, my foot. No changes whatsoever, but 5 percent year on year increase and add ons for flood defence and social care by a Javid. Despite Tory govt promise of price freeze.

        JR, as Mark points out he is spot on. Your govt has become wasters like Labour, there is no difference between New Labour and your party. Perhaps your party being left of New Labour with its thought crime, jumping for minority causes against majority wishes, sugar tax. Hounding and sacking of Scruton by Brokenshire without even trying proper process!

        Brexit Party or no vote for me. I will never vote Tory again. Major proved Tory govt unfit economically, Cameron, Mayhab and zjohnson have never kept the central promise to balance structural deficit. What is galling is the waste on overseas aid, Leaving the EU, EU military spending when we are meant to leave!

    2. Simeon
      November 10, 2019

      Good morning

      What Sir John says is, broadly speaking, ok in theory. Of course, in practice we know the state is a profligate spender and poor investor. Perhaps if the likes of our host were in government the state would enjoy a better reputation. However, there is no chance of this, so again, in practice, best to keep the state’s spending power to a minimum.

      Collective action to create economies of scale is an excellent way to achieve value for money and increase wealth. But this collective action should be entered into voluntarily.

      Such are the principles to which we ought at least to aspire. In terms of actual political parties with actual policy agendas, we are impoverished. All of the available options represent increased, unreformed, unwise spending and an intention to accumulate more power over the citizenry.

      1. Lifelogic
        November 10, 2019

        They care not what they spend, nor what value they get. It is not their money after all, nor they who get the value. So they care not what value they are delivering at all – so long as they get paid a good wage, generous expenses, sick leave, long holiday, business trips to the EU and good pensions.

        Unless the politicians are using it to buy votes, keep their “consultancy” fees or for political propaganda as politicians so often organise. Then they might get re-elected – perhaps and some more consultancies, expenses and salaries.

    3. Martin in Cardiff
      November 10, 2019

      The estimated seven percent of GDP that this country spends on crime and its effects cannot really be called “investment”.

      This is around twice the pro-rate European Union average, and about ten times our overseas aid.

      Why is THAT not the continuous headline news?

      Why is THAT not the paramount concern of the country?

      We know, don’t we?

      1. agricola
        November 10, 2019

        We do not spend it on crime, we spend it on containing and preventing crime, but not with any great success at present. The rate of spend is probably proportional to the amount of crime. Perhaps some of our EU partners are less criminal or perhaps they come to the UK to indulge their criminal activities. These days most reported criminal activity in the UK seems to be of none Anglo Saxon origin. Unless they are the Mr Bigs who never get caught. PC is so rife this aspect of crime never gets reported until it gets to court and this is only a small percentage of the total.

      2. Know-Dice
        November 10, 2019

        Martin,

        Not sure where your “facts” come from?

        Eurostats shows for 2017 UK expenditure on “public order and safety” @ 1.8% of GDP which is pretty well the average for the EU 28.

        In 2017, the level of expenditure on ‘public order and safety’ as a percentage of GDP was highest in Bulgaria (2.5 %) and Hungary (2.4 %) and lowest in Denmark (0.9 % of GDP), Ireland (1.0 % of GDP) , and Luxembourg, Finland and Malta (all 1.1 % of GDP).

        https://ec.europa.eu/eurostat/statistics-explained/index.php/Government_expenditure_on_public_order_and_safety#Expenditure_on_.27public_order_and_safety.27

      3. libertarian
        November 10, 2019

        Martin

        Yes we do know, its because we have a massive amount of low level crime, we have a large amount of knife crime BUT our policing budget is wasted on “woke” rainbow coloured police vehicles and chasing down people who say hurty words on social media

        By the way in France ( a country you’ve never visited) the spending on policing and crime is £10b in UK its £12b so you might want to provide some statistics to back up your post claiming TWICE the average

        1. Lifelogic
          November 11, 2019

          In Scotland they piss the money down the drain by marking the police cars in Gaelic despite almost no one speaking this language about 1% and I am sure this 1% all know what “Police” means.

  2. Stred
    November 10, 2019

    PFI has been a disaster, leaving the taxpayer with far higher interest and maintenance charges. The private suppliers produced better designs by opening the process to better architects and surveyors but this could have been achieved by privatising the management by competitive tender. The loan could have been provided by government at much lower rates and then the building would be owned. If this had been done at Hinckley Point the cost of the electricity would have been much lower. The high cost of hospitals and schools is leading to the shortage of staff and equipment, deaths and dumbed education.

    1. Mark B
      November 10, 2019

      PFI was massively expanded by Labour to take its spending off the books. PFI works with small unique projects.

  3. agricola
    November 10, 2019

    Capital projects by government are very complex to assess. There is the reduced running cost plus of course the cost of borrowing and capital repayment against the higher running cost and maintenance of an older building that has already been paid for. The difficult part to assess in health and education is the cost of not doing anything which could be enormous financially and socially.

    Where there is a service that is directly paid for by the end user it is easier to calculate cost except that in the case of railways government muddy the water by subsidising the enterprise. I have not seen any projection of the real cost per passenger of reducing the journey time Birmingham to London by 20 minutes on HS2. At times the cost, when the journey is required by the majority can be enormous on the normal train service. I suspect that real costs on HS2 will be in the Concorde class. At the end of this month I will fly Birmingham to Alicante for £39.00 or £57.00 with lots of leg room and 10Kg of hand luggage. This is on a private enterprise airline dependant solely on what I pay. The airline has to pay for use of each airport involved. I suspect that HS2 is going to cost the nation/you and I, £100 billion, I estimate based on most previous government over runs, by the time it is completed.

    My question is, why are we not developing Birmingham and London City Airports to run an air bus service every ten minutes at £20.00 a seat. It is 100 miles to London and 1200 miles to Alicante from Birmingham. Hs2 does not add up. On top of which journey time would be about 30 minutes.

    1. Mark B
      November 10, 2019

      The question should be, with modern communications technology, why are we traveling at all ?

      1. Dame Rita Webb
        November 10, 2019

        In order to drive down costs, once he had replaced Goodwin, Stephen Hester instituted a travel ban. If you want to hold a meeting you do it over he internet rather than run up hotel and transport bills. If RBS can do it, there is no reason anybody cannot, especially the civil service.

        1. Lifelogic
          November 10, 2019

          Then the bank screwed most of their good customers and thus damaged countless sound & solid businesses who had nothing to do with the bank crash. Thus hugely damaging the UK economy killing jobs and destroying many sound businesses. Gordon Brown rescued the banks at vast expense but did nothing for these borrowing customer at all (other than taxing them even more and robbing their pension pots – a policy continued by tax to death Osborne and Hammond).

      2. Everhopeful
        November 10, 2019

        Ha! Well soon, if the agenda gets its way we WON’T.
        Just the 1% in all the planes, trains and ( electric,driverless) automobiles!

      3. agricola
        November 10, 2019

        It is in the DNA of man to travel for myriad reasons. Everest got climed because it was there according I think to Eric Shipton. Been doing it all my life with no regrets.

        If you are alluding to the great daily commute then I agree with you. A vast number could stay at home with a computer terminal, saving money on fares and being far more productive. Did it with success for thirty plus years.

    2. Stred
      November 10, 2019

      MPs rejected the proposal to renew the abandoned Central Line, which was costed at a fraction of HS2 and could have taken freight and passenger capacity, freeing up the existing lines. They wanted to have a faster train set than their European schoolfriends.

      1. miami.mode
        November 10, 2019

        Well said, Stred. A new play on Top Trumps.

        1. Lifelogic
          November 10, 2019

          Indeed. The only policy that the Green Party has, that is remotely sensible, is cancelling the bonkers HS2. All the Party leading figures clearly do not understand anything about energy, science, transport, economics, logic or engineering at all. It is a bonkers new religion. Nothing green about their policies either – quite the reverse.

  4. acorn
    November 10, 2019

    The Treasury guide, ‘Supporting Public Service Transformation: Cost Benefit Analysis Guidance for Local Partnerships’, is what you are looking for.

    1. acorn
      November 10, 2019

      Moving to a “pay as you go” model, extending to hospitals, schools and local government services eventually, would be a very good way to go.

      “Free at the point of use” has created a culture of derealization and disconnection from the real world in the UK citizenry. Hypothicating taxation fees and charges directly to public services; and, introducing percentage co-payment requirements would help restore reality. For instance, a thirty-minute private GP consultation costs circa £120. Would you pay £40 for a ten minute NHS GP consult?

      The UK roads infrastructure is currently generating £44.8 billion from 37 million vehicles, (VED + Fuel Duties + VAT on Fuel Duty + VAT on Fuel price). The RAC reckons there were 328.3 billion vehicle miles travelled last year that would be 13.6 pence per vehicle mile. £16 to do a lap of the M25.

      1. Edward2
        November 10, 2019

        I looked at a report by the RCA Foundation which says the Government makes a big profit on vehicle tax.
        Spending much less than it receives.

        And near me there is a private health clinic where you can see a GP.
        It charges much less than £120 and same day appointments are available.

        1. Dame Rita Webb QC
          November 10, 2019

          The German state system is better value for money. I required the services of a doctor in a small town. I handed over forty euros, filled in their forms, got seen and was in and out in half an hour. Dutch A&E is just as good again a small sum was needed upfront. Its something the NHS needs to think about if it’s concerned about waiting times

        2. Lifelogic
          November 10, 2019

          Indeed and it could easily be done for circa £50 with more economies of scale and you could get to see a doctor with skills, test facilities etc. in the relevant area too.

          But this desirable outcome is largely killed by the “free” at the point of use NHS.

        3. libertarian
          November 10, 2019

          Edward2 / acorn

          Near me is the former PRIVATE Civil Service Union hospital ( I kid you not) that is now a newly refurbished ultra modern private hospital . You can get membership for £10.25 per month per person ( no exclusions) that gives you on call access to a GP and a range of surgical and hospital stay treatments ( but not everything) at no further cost once you’ve been a member for 6 months

          It costs 25Euros for a GP appointment in France

          In Germany the cost of a GP appointment is between 19 Euros and 50 Euros depending on whats being done and if you have state health insurance

          In the USA which is the most expensive healthcare system the cost of a GP visit is $125

          Why is the NHS so expensive?

          Why do socialists like acorn keep banging on about pay as you use health care when I dont know anyone in the UK asking for this. We want universal health care delivered by the best local provider NOT a state behemoth centrally controlled wasteful , disconnected bureaucracy

        4. Edward2
          November 10, 2019

          typo…should of course say the RAC

  5. Everhopeful
    November 10, 2019

    Here they sold off a perfectly good and much loved school for housing.
    A new Stalinist-ugly school was built in a most inconvenient place.
    It was built on stilts because it is in a flood zone ( which has flooded many times.).
    Not sure if “ they” know it is sited on a buried river, covered over in the 1960s.
    ( “They” don’t like inconvenient history much!).

    All this very near the garrison …all the soldiers’ homes sold for a song.
    EU army-ready?
    Budget? Its all about selling our country off…and selling us down the river!

    1. Dame Rita Webb
      November 10, 2019

      Mr Robert Jenrick, the housing minister, has really mastered his brief. Interviewed by Nick Ferrari, he sez, that if the tenants so wish, an ugly tower block can be demolished with loads of new houses built in the vacated space. Its the Labour front bench’s competency we are supposed to be worried about is it?

      1. Lifelogic
        November 10, 2019

        These dopes will say anything to get elected. Still we do not want Corbyn/SNP so perhaps they should do.

        Can Boris not appoint Corbyn’s brother with his first in Physics at imperial to advice on Energy and Climate he is very sound on these subject certainly far, far better than the recent ministers!

        If we want more homes then knocking homes down is not a sensible policy! Often planning dictate you destroy one home to build a new better one. Why? If there is space not keep it and have two for less than the price of one?

  6. GilesB
    November 10, 2019

    Just as important as return on investment is the return on regulation.

    The EU does not need a financial or operational justification for regulation. It is sufficient for the Commission that an EU level regulation will undermine national level parliaments, industry associations, and trade unions and do support ‘towards ever closer union’. For them that is enough.

    We need to be much smarter. Regulations can improve wellbeing and standards of living and compensate for market failures. But the benefit has to exceed the cost. All of the cost including the time, energy and stress for individuals and small businesses.

    Parliament should put a sunset clause of five years on ALL regulation until each rule has a clear published justification

  7. Dominic
    November 10, 2019

    What percentage of State expenditure is –

    A. Spending that is absolutely essential to maintain an orderly provision of State delivered services

    B. Spending that has been filtered through the prism of political advantage

    A. is apolitical, essential and I doubt no one would object to. B. is spending taxpayers money whose primary aim is the securing of a political advantage for a political party when in government.

    B will bankrupt the UK’s taxpayer.

    It is important that the voter understands that spending taxpayers money is not a political achievement. You do not reward parties that promise to spend more of your money.

    In effect we are being asked to finance the political fortunes of political parties we despise. It is the great deceit on a par with the ability of Labour to deceive it’s traditional core vote into believing they are still the party of Attlee

  8. Kevin
    November 10, 2019

    Speaking of investment, according to Brexit Party videos, under the Withdrawal Agreement the UK is leaving £7 billion of our money with the European Investment Bank. Apparently, we are only claiming back €3.5 billion (this figure was quoted in Euros), to be returned over a period of twelve years. On top of that, over that same twelve-year period we are said to be potentially liable to the tune of thirty to forty billion pounds of “callable capital” in the event of a Eurozone financial crisis occurring during that time. We would not incur this potential liability, the Brexit Party says, if we had the clean-break Brexit that we voted for. What is more, their Party would seek the return of all of our money from the EIB. Do the Conservatives have any comment on this?

  9. Everhopeful
    November 10, 2019

    Off topic ..but unbelievable.
    I see that ( if true) Boris now has his own “ Dementia Tax” moment.
    According to MSM he is arranging for 4x the number of non EU migrant farm workers to come into the country.
    So this is Brexit? ( Will Brexiteers vote for BP with this news…and get Labour?).
    Why not just change the benefits system to allow people already here to work on farms???
    Well we know why.
    Keep swelling the numbers wanting jobs and wages are driven down!!

    1. Simeon
      November 10, 2019

      That BJ is pro-immigration is no secret. The kind of immigration here is in particular business’s interest, not the national interest. In principle, there is nothing wrong with immigration. This country owes much of its historical success to immigration, and that we are perhaps the most tolerant nation on earth is in no small part due to exactly this.

      But unmanaged immigration that we as a state and a society are woefully unprepared for, and that serves primarily to depress wages (and boost Labour’s vote), is evidently disastrous. What compounds the problem is our absurdly generous benefits system; desperate people understand that they will be better off in the UK than in France for example – so much so that they will risk their lives to get here. Freedom of movement within the EU is, obviously, a function of being in the EU. Our benefits system has nothing to do with the EU; for this, and its consequences, we have onky ourselves to blame.

  10. Derek Henry
    November 10, 2019

    “The Balanced budget rule still provides a constraint on how many new buildings you can build to expand a free to the user service”

    Sorry but you are wrong.

    What skills and real resources we have is the only constraint

    “This expensive motorway offers no direct financial return to the taxpayers who paid for it.”

    Wrong again that is gold standard thinking. Governments spend first and collect taxes off that spending as it flows around the economy. As long as there is enough skills and real resources to build it taxes do not need to rise in order to control inflation.

    “the case of borrowing to provide a new school the case is overwhelming where there are more pupils than school places in a local area. ”

    wrong again government borrowing is not fiscal policy like that of a household or business it is monetary policy.

    The government could just credit bank accounts to have the new school built. Why on earth should the monopoly issuer of the £ borrow £’s John? It is like saying the monopoly issuer of widgets has to borrow widgets.

    Government borrowing is a left over of the gold standard. We are no longer on it. It is nothing more than a reserve drain.

    Debt issuance assists the central bank to drain excess bank reserves that were generated by the net spending (deficits) in the first place. So the BOE can hit its overnight interest rate.

    If you do not believe me ask them. They will tell you I am telling the truth and even produced a paper on it.

  11. Al
    November 10, 2019

    Slightly off topic, but since we are discussing investment, according to the newspapers, the Labour plans will cost £1.2 trillion (significantly more than even the Marshall Plan in modern money). This will mainly go on four-day weeks, UBI, and nationalisation.

    If you were going to spend £1.2trillion, which I doubt you would as it is money the country doesn’t have, what stimulus would you spend it on?

    1. Lifelogic
      November 10, 2019

      Huge tax cuts from the current (highest and most complex taxes for 40 years position) plus redundancy payments for the very many people in the state sector that produce virtually nothing of value or worse still just inconvenient the productive with endless damaging and idiotic red tape or other regulations. People spend and invest their own money from to 2 to infinity times better than government do.

      One of the worst things to spend it on would be “renewables” and moronic fake green crap which is what the bonkers Greens, the Anti-LibDims, Plaid, SNP and Labour want to piss so much of it away on.

    2. Lifelogic
      November 10, 2019

      Nearly £50,000 per household! The householder would in general spend it far, far better than government so large tax cuts please.

    3. nhsgp
      November 10, 2019

      What’s another 1.2 trillion on top of the current 13 trillion state debt [1]

      [1]. Borrowing is not the only debt the pensions are bigger.

  12. Derek Henry
    November 10, 2019

    The balanced budget rule is a self imposed constraint that is not needed in our monetary system.

    Here what is needed.

    https://neweconomicperspectives.org/2015/01/replacing-budget-constraint-inflation-constraint.html

    Let’s stop pretending that replacing a budget constraint with an inflation constraint is so hard. It involves a change in perspective, nothing more and nothing less. It doesn’t give license to policy makers to do whatever they want. Which can only be a good thing.

    It does mean however the OBR and IFS will finally be doing something useful with its deficit projections—namely, building models to understand how deficits will affect the macro economy.

    Their current models assume an economy is

    a) at full employment at all times

    b) warn of impending financial ruin as a result of a deficit

    There are 3 important rules that can’t be ignored.

    1. Inflation happens when the deficit is too big

    2. Unemployment happens when the deficit is too small.

    3. The deficit has to meet the “saving desires” of households and business.

    1. Edward2
      November 10, 2019

      Unemployment and recessions can be caused by taxes which are too high and by bigh interest rates.
      Both are tools used by governments to reduce the high inflation your policy ideas would create.

      1. Derek Henry
        November 11, 2019

        There would be no inflation if there are enough skills and resources to absorb both the tax cuts and extra spending.

        I see you think tax cuts will not cause inflation but government spending will

        Pure ideology based on false assumptions.

        Both do

        1. Edward2
          November 11, 2019

          That’s a big “if” there Derek.

          Tax cuts just transfer money from State sector to the private sector.
          Just simple economics.
          Nothing to do with ideology.

  13. Lifelogic
    November 10, 2019

    Well education can be an investment but much university education is virtually worthless as are many of the subject they choose study. At least half of UK degrees are surely are. Leaving people with 50K of debt (or more likely the tax payer with it), a disillusioned graduate in say Gender and Media studies from the ex-poly of Bognor or similar. Plus they have wasted three + years that they could have been earning and learning how to work.

    Education is rather over rated in many areas. People are either bright or not so bright education has rather little effect on this. See the Great University Con and The case against education books.

    1. Lifelogic
      November 10, 2019

      The endless false claims by Government that obtaining a degree means you earn £250K (or similar) more over a lifetime are totally false – other than in a few protected professions perhaps. They are based on historical figures when only perhaps 10% went to university not circa 50%. They also confuse cause and effect. Did the people earn more “because they went to university” or were they just brighter and so went to university and then earned more as a result of being brighter?

      The latter seems a far more likely explanation. These claims, one assumes, are made by politicians who do not understand cause and effect, maths, logic or stats. (PPE, Law or English Graduates perhaps?)

  14. Gareth Warren
    November 10, 2019

    That is a good way to think about government investment if we charged for the M25.

    How we judge medical investments is difficult, a £50,000 operation on a 80 year old would be difficult to justify, but he might then have 20 years more healthy life.

    Perhaps we could start by looking at what not spending the money costs us. Long delays for simple operations cost the country missed wages, not diagnosing a neurological condition could blight a lifetime of earning and require a lifetime of care.

    I do suggest though that you press to make health insurance manditory in the UK after brexit, blocking people without it from leaving the airport and charging the airline. The reasons for this is while NHS hospitals are supposed to recover costs there is no benefit for them, so they do not.

    1. Mark B
      November 10, 2019

      You cannot enter Russia without health insurance. If the Russians can do it, why not us ?

  15. nhsgp
    November 10, 2019

    Investing in people, owning them, is against the modern day slavery act.
    But you can and have got them into debt bondage.

  16. BillM
    November 10, 2019

    On the grounds of a bad investment HS2 would be shut down.
    But why does the Government not call in Business management professionals to evaluate and decide whether a project is actually a good investment, or not?

  17. undecided
    November 10, 2019

    Such a shame it was not you in the Chancellors place this morning with Andrew Marr. It’s one thing to highlight the absurdities of Labour’s economic and fiscal plans, another to articulate a sound economic and fiscal plan with appropriate balance and incentives between business, individuals, families, public services, infrastructure and the environment.

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