There are only a handful of votes in government-funded infrastructure spending. Labour finance chief John McDonnell might see the sense in boosting the amount spent on roads, rail, fibre-optic cabling, skills training and green energy. Paris-based thinktank the OECD is in the same camp, along with the International Monetary Fund; they have both urged the government to push ahead with plans already on the drawing board. And lined up end to end, economists in favour of infrastructure spending would stretch to the moon and back.
But the Treasury has held firm. Austerity was a vote-winner in the last election and will be so again in 2020. It’s something Jim O’Neill discovered in his time as a treasury minister and it appears to be one of the main reasons the former Goldman Sachs economist resigned on Friday. There is no money for the northern powerhouse – not unless it is recycled from elsewhere.
Long gone are the days when Gordon Brown could slap a penny on national insurance and get a cheer when he promised to spend it on the NHS. Respondents to Ipsos Mori surveys show the health service dividend is largely spent, leaving voters split three ways in their views on what do about meeting growing demand.
A third say the answer is rationing, by which they mean excluding smokers and other groups from some treatments. A third say extra funds should come from efficiency savings. Only a final third support extra taxes.
Ipsos Mori polling shows that there are some discrete areas of spending that voters will sanction, in particular on housing. But this support is offset by a clear drift towards nimbyism that divides the pro-investment group from the anti and can be seen in planning disputes across the country.
It is in this context that the Treasury under George Osborne, and now Philip Hammond, has remained firmly of the view that there is little public appetite for multibillion-pound projects funded by either higher taxation or with borrowed money that might push the national debt higher.
And the pressure on Hammond to keep a tight rein will only have intensified ahead of the autumn statement, after public debt figures for August showed government borrowing heading for a bigger deficit than planned.
Not that ministers are immune to extra spending because they have an in-built ideological resistance to it, though some on the free-market fringes of the Tory party do. They resist the temptation to give the go-ahead because a public majority backs low taxation and bare-bones services.
Crucially, people across the political spectrum have swallowed a line about extra spending being a burden on the young, which makes every protest at borrowing to build new schools and hospitals feel virtuous. Higher borrowing now is not paid by today’s taxpayers, but tomorrow’s, they say.
Comments last year by the new trade minister, Liam Fox, sum up the sentiment: “We must continue and, if possible, accelerate fiscal consolidation. It is quite unacceptable that the debts of a more affluent generation should be landed on a less affluent one.”
This phrase was repeated by countless ministers, having had its origins in what was regarded as the most effective poster used by the Tory party at the 2010 election. It depicted a newborn baby under the headline: “Dad’s nose, Mum’s eyes, Gordon Brown’s debts.”
Earlier this year, Osborne was still pushing the same buttons, hailing his March budget as “putting the next generation first”, before outlining another £12bn of welfare cuts and the target of a budget surplus in 2020.
These are arguments that must be confronted. Not that it will be easy; the worse than expected finances will restrict Hammond’s room for manoeuvre. Nevertheless, telling well-off baby boomers that constructing sophisticated infrastructure at the earliest opportunity provides young people with jobs, better health outcomes and a better standard of living is essential. Delaying the same infrastructure spending until such time as the government has a surplus is only to punish the young, leaving them to play catch-up with other countries’ industrial, digital and healthcare investments.
When Larry Fink, the chief executive and chairman of the world’s largest fund manager, BlackRock – it manages $4.4tn of investments – says that chief executives on both sides of the Atlantic tell him there is no reason to invest at the moment, you know the private sector will not be the answer.
Labour’s answer is, in part, to tax. But there is no appetite for paying higher taxes either.
That leaves borrowing, which is not such a scary prospect when international investors are prepared to lend money at rock-bottom rates. It can look like a gamble to borrow to build a road, cycleway, train link or skills academy that provides secondary effects for the private sector. But when the effective interest rate is below 1%, the economy only needs to grow modestly on the back of these developments to make the borrowing pay for itself.
McDonnell proposes a £500bn national investment bank. What he fails to recognise is that the argument is still in the proverbial basement, waiting to emerge on the ground floor. As such, he hasn’t even made the case for government to regain control before he’s blown £500bn. There is much more work to do before any kind of state-sponsored bank can spend even a fiver.
