The economic rationale behind investment

The only way that investment makes any economic sense is for it to either pay for itself in the long term, or avoid the necessity of paying a greater sum for something else.

In the case of investment in transport infrastructure, for example a new road, the reason for doing it is that it will make it easier to do business. As a result the businesses affected will make more profit and/or employ more people; and perhaps new businesses will be set up or relocate from elsewhere in order to do the same.

When the public sector makes the decision to build a new road, it will (unless it is a toll road) aim to recoup the money borrowed to build it through an increase in tax receipts. If the companies affected are more profitable, the government will get more corporation tax. If the companies affected employ more people, the government will get more income tax and national insurance. If the people these companies take on were previously unemployed, the government will save money by no longer having to pay them benefits.

These are the ways in which public sector investment can pay for itself. It's a question of doing the sums to see what those benefits might be, and balancing them against the cost of the investment. If the sums add up, fine. If they don't, there is no economic justification for building the road.

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Now let's look at the specific case of a new road in Wales. The Welsh Government might well be granted borrowing powers that would enable it to pay for a new road, but how can it expect to recoup the cost of that investment? Any extra corporation tax will go to ... the Treasury in London. Any extra income tax and national insurance will go to ... the Treasury in London. Any money saved by no longer having to pay benefits will be kept by ... the Treasury in London.

The Welsh Government pays, but all the benefits go directly to the Treasury in London.

The current Welsh Government is working itself into a frenzy of excitement because it is likely to be given powers to borrow. But in terms of paying that money back, it is relying on a handful of minor taxes like aggregate levy, stamp duty, landfill tax and air passenger duty (and it could only do that by increasing those taxes, even though the indications are that they would reduce stamp duty and air passenger duty).

Yet, at the same time, it has turned its back on devolution of corporation tax, income tax, and the benefits system. To the extent that the Welsh Government was willing to take responsibility for these things it would get an economic return on any wise investment that it made. If it took control of 50% of income tax, it would get 50% of any increase in income tax that came as a result of the investment. If it took control of 66% of corporation tax, it would get 66% of any increase in corporation tax that came as a result of the investment.

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Like an 18 year old who is about to get their first credit card, the current Welsh Government can see what it wants to buy and has worked out that it will just be able to pay the interest out of the receipts from a few minor taxes. But it doesn't have the foresight to realize that the far larger additional income stream that could and should be used to pay off the debt and result in greater prosperity for Wales is going to be channelled straight into the coffers of the Treasury in London instead, to be shared across the UK as a whole.

This is why borrowing powers must be linked to taxation powers. It's not only about being able to afford the interest payments; it's about whether the investments we make will be of overall economic advantage to Wales. An arrangement under which we pay 100% of the cost of an investment but only get 5% of any return on that investment is economic madness.

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12 comments:

Jac o' the North, said...

Lack of foresight and ambition about sums up Welsh Labour.

Anonymous said...

Whilst I would take issue with some points here, the conclusion is spot on. Taking on borrowing powers and using them would be insanity. What responsible lender would lend to a borrower with no income source? Oh, hang on....!

The end result is inevitable - somewhere down the line the debts, being completely unrepayable (is that a word?) would be 'repaid' through a fire sale of Welsh public assets.

Borrowing money without tax powers is nuts. But governments should not borrow money unless they have the power to issue their own currency. And if they can issue their own currency, they don't need to borrow!

MH said...

You're quite mad, Anon. The UK government issues its own currency, but they borrow and the UK is now up to its neck in debt. If they simply printed money to pay for things instead of borrowing, the currency would quickly become worthless.

Anonymous said...
This comment has been removed by a blog administrator.
MH said...

Either find something more intelligent to say, or find somewhere else to say it.

Anonymous said...

That's incredible. I have never seen such careful censorship on a blog.

Do you disagree with what I said? If so, why? I'm more than happy to discuss, which is clearly more than can be said for you.

Or did you just not understand what I said? In which case I'm more than happy to go into more detail.

MH said...

By all means go into more detail, Anon. If what you say is in any way intelligent, it won't get deleted. But you'll have to do rather better than you've done so far.

Anonymous said...
This comment has been removed by a blog administrator.
Anonymous said...
This comment has been removed by a blog administrator.
MH said...

Set out what you want to say as clearly as you can, Anon. If you can make your point intelligently, it won't get deleted; and if it's in any way interesting, I might reply to it.

Anonymous said...

Oh look Michael, the new governor of the bank of India is issuing Inflation Indexed Savings Certificates (ie government debt - debt issuance, not money issuance, you'll note), because, he says, "Everyone has a right to a safe investment vehicle". You can see his statement in full here.

Seeing as you were utterly convinced that I was "mad" because I claimed government debt is to provide safe investments, not fund expenditure, perhaps you'd like to apologise, reinstate my comments, and continue with a more mature discussion?

MH said...

You should read what I wrote more carefully, Anon. I didn't say you were mad because you claimed that "government debt is to provide safe investments, not to fund expenditure". I said you were mad because you had said that:

"... governments should not borrow money unless they have the power to issue their own currency. And if they can issue their own currency, they don't need to borrow!"

So what are you getting worked up about?

However, as you've raised the subject, there is no mutual conflict of interest between the two. From the point of view of the investor (or saver, if you prefer) government debt is a secure investment ... at least to the extent that the economy of the country concerned is stable. But what does the government do with the money it receives from these investors? One way or another, it spends it. It can either use it to fund its expenditure programme, or it can use it to reduce the amount it would otherwise need to raise through taxation in order to fund its expenditure programme.

So if you think that government debt is not to fund expenditure, you are every bit as mad as I said you were.

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