Borrowing money for the wrong things

I think most people reading this will know that the Welsh Government (unlike the Scottish Government) is not able to borrow any money, but that our local authorities can. So on the face of things it looks like the Welsh Government's decision to co-ordinate existing council borrowing powers, and specifically to pay the cost of that borrowing through its annual revenue grants to local authorities, is a clever idea.

     Welsh councils' £60m road repair borrowing could pave way for new money

And in principle it is ... but everything depends on what that money is spent on.


Borrowing to pay for capital investment projects is generally a good idea. We need things like new schools, new hospitals and new transport links, and it is simply a question of doing the sums to see if the benefit to cost ratio of any particular scheme is favourable. It very often is: especially if, for example, the new school or hospital replaces an old building that will cost more to maintain and provide energy for than a new building would, or if a new road or railway investment will save people and businesses time and money and thus boost the economy. In both cases the investment will pay for itself in the medium to long term.

But borrowing money simply to pay for the maintenance of existing infrastructure is something very different. It doesn't pay for itself, and never can. Even if this £170m over 3 years pays for some badly-needed repairs to our roads, no-one in their right mind could imagine that it will be 22 years (the time it will take to pay this loan off) before many of the very same roads will need repairing again. What will happen after five or ten years? Will the Welsh Government co-ordinate another round of borrowing on top of this one ... and yet another round of borrowing five or ten years after that? It is mad-house economics. It is a short-term fix at the expense of long-term planning.

Co-ordinating local authority borrowing powers is a good idea, but only if used for capital investment rather than maintenance.

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Anonymous said...

100% agree - it's like a company taking a loan out so they can have money to re-flower the flower bed.

Owen said...

This is one of my greatest worries about devolved borrowing powers. If this, or any future, Welsh Government used borrowing to stave off making cuts/changes to revenue expenditure I'd be furious. There should be strict guidelines on borrowing from day one - that it has to be spent with, as you said MH, the expectation of a return. That's why I would prefer the "Build for Wales"/Infrastructure Bond model for public borrowing in Wales, so it's (in the most part) out of politicians or civil servants hands.

Using borrowing to cover revenue spending hints at much deeper economic problems, mainly making up for a lack of tax income to meet spending/political pledges. That's effectively what the UK Government has been doing for the best part of a decade or more - and while the banking crisis was the "tip of the iceberg", the UK's national debt is all the stuff you can't see. All the talk of deficit reduction is just reducing the amount borrowed year on year. It's a disaster waiting to happen. We're just fortunate that the UK isn't a member of the Eurozone and can inflate some of it away.

Wales certainly doesn't need to follow suit - devolved or independent.

MH said...

I couldn't agree with you more, Owen. What's particularly upsetting is that we should fall into this trap now when we largely succeeded in bucking the borrowing trend that the rest of the UK indulged in over last decade or so. In terms of devolved PFI exposure, the capital value per head of PFI projects was (in 2008):

Scotland ... £1,001
England ... £990
Northern Ireland ... £620
Wales ... £205

Source - pp18-19

And in terms of non-devolved expenditure through the Wales Office, Wales had only £13m expenditure on PFI, compared with Northern Ireland's £118m, Scotland's £820m and a UK total of £4,466m in 2008-09. Although Wales will have benefited from some expenditure in non-devolved areas such as defence.

Source - p4

Put in blunt terms, we simply didn't build anywhere near the same number of new schools, hospitals and roads using PFI as the rest of the UK did. Instead, we tended to build what we could out of the capital portion of the block grant and therefore are not exposed to the same level of debt as the remainder of the UK ... at least as far as capital expenditure projects are concerned, as PFI was the preferred way of funding them. Obviously we're exposed to a pro-rata level of UK debt for everything else.

The sad thing is that Labour will, I'm sure, justify doing what they are now doing by saying that Wales' level of borrowing exposure is only a small fraction of what it is in the rest of the UK, and that we can therefore afford to "catch up".

Anonymous said...

In fairness Owen the Welsh Government is only asking for borrowing for capital, not for revenue.

The Scottish Government is asking for both.

With that said I don't agree that restrictions should be placed on Welsh borrowing, even though we know the current Government is rubbish. They should have the same borrowing powers as Scotland at the very least and comparable sub-state units.

Wales has a good record on (not using) PFI and should only borrow prudentially. While not using PFI was a sign of Welsh socialism, it was actually very conservative and prudent to have not used it. But that conservatism and good credit rating if you like, means Wales has a largely deficient infrastructure.

We are not looking at a Greece situation being possible where there is spending on pet projects and mass tax evasion. It is vitally important that borrowing is for investment in the economy as Plaid Cymru repeatedly has stated.

Scotland is not really a bad model to look at. They are already using local authority borrowing powers. They are getting normal borrowing powers, and they also have a Build for Wales style vehicle called the Scottish Futures Trust. They can pay all of this back because they are fairly funded.

Wales isn't in the same boat but we need to get there if our economy is ever going to be remotely fit for purpose.

MH said...

I'd agree with Anon 10:13 that a government should have freedom to borrow as it likes, without restriction. Freedom includes the freedom to make bad decisions; that's what responsibility and accountability to the electorate is about. If this Labour Government does stupid things, it's better that it should be redressed at the ballot box, rather than being restricted by Westminster. As I tried to say in this post a couple of weeks ago, not having that responsibilty gives Labour an advantage in the polls because they don't have to take responsibility for how the money they spend is raised. They want to be able to point the finger of blame at someone else for that.

As for Scotland, it's not just a question of asking. Perhaps it's better to say that because the Scottish Government will now be responsible for roughly half of income tax revenue they, like every other government, will need to have the cushion of short-term borrowing because of possible fluctuations in the tax take over the economic cycle (let's call that between 3 and 7 years) ... though of course the economic cycle can't be separated from the electoral cycle, as every government wants to leave more money in people's pockets just before an election.

In our case it's probably fairer to put it the other way round and say that the current Welsh Government is asking only for capital borrowing because it doesn't want major tax-setting powers.

Anonymous said...

MH- exactly right. If Wales sets any taxes it will need revenue borrowing powers. Borrowing revenue to deal with cyclical variations is a normal part of managing a national taxation system.

Owen's concerns can only be addressed by Wales taking responsibility for itself and for the Welsh electorate to make judgements on performance. We can't seriously say that certain powers being granted to Wales or not should be conditional on how they are used, that is fundamentally unfair and undemocratic.

Incidentally it's quite likely that Labour Welsh Governments would be extremely conservative and timid in terms of borrowing. It might be politically convenient to say they would go on a spending spree but I don't see anything in "Welsh Labour's" line up that suggests they are adventurous or reckless. But at least there could be a debate about that.

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