Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday 5 November 2015

Public investment: has George started listening to economists?

I have in the past wondered just how large the majority among academic economists would be for additional public investment right now. The economic case for investing when the cost of borrowing is so cheap (particularly when the government can issue 30 year fixed interest debt) is overwhelming. I had guessed the majority would be pretty large just by personal observation. Economists who are not known for their anti-austerity views, like Ken Rogoff, tend to support additional public investment.

Thanks to a piece by Mark Thoma I now have some evidence. His article is actually about ideological bias in economics, and is well worth reading on that account, but it uses results from the ChicagoBooth survey of leading US economists. I have used this survey’s results on the impact of fiscal policy before, but they have asked a similar question about public investment. It is

“Because the US has underspent on new projects, maintenance, or both, the federal government has an opportunity to increase average incomes by spending more on roads, railways, bridges and airports.”

Not one of the nearly 50 economists surveyed disagreed with this statement. What was interesting was that the economists were under no illusions that the political process in the US would be such that some bad projects would be undertaken as a result (see the follow-up question). Despite this, they still thought increasing investment would raise incomes.

The case for additional public investment is as strong in the UK (and Germany) [1] as it is in the US. Yet since 2010 it appeared the government thought otherwise. Public net investment, which was 3.2% of GDP in financial year 2009/10, has fallen to an expected 1.5% of GDP in 2015/6. We are about to have a spending review where non-exempted departments have been asked to look at cuts of at least 25%. One of those departments is the department of transport, which is responsible for almost a quarter of public investment.

However since the election George Osborne seems to have had a change of heart. First he has implemented Labour’s proposal of a national infrastructure commission, which was in turn one of the ideas of the LSE’s growth commission. If it works it should reduce the number of political white elephants that US economists worry about. Second, he has talked about spending £100bn on these projects before 2020. That is a huge sum: the total for annual gross public investment is currently around £70 billion.

So how do you square £100bn extra public investment with the government’s goal of achieving surplus by 2019/20? Is the £100bn a smoke and mirrors number? We will find out when the Autumn Statement is published. Ignore any numbers quoted by the Chancellor. Instead have a look at the OBR’s figures for net public investment as a percentage of GDP (you can find a time series in their databank here). In the June budget public investment was expected over the next 5 years to stay at or below the 1.5% of GDP figure. If the numbers in the Autumn Statement forecast are significantly above that, we will know that the Chancellor really has started listening to economists.

[1] Postscript. An IMF study on German infrastructure investment is here.


  1. "If [the national infrastructure commission] works it should reduce the number of political white elephants that US economists worry about."
    Except that several members of the commission are also already involved with HS2: which is not so much a white elephant as a whole herd of albino woolly mammoths.

  2. "The wise man does at once what the fool does finally".
    Got there finally George!
    Great post as usual, but you might have added the caveat that if George Osborne has started to listen to economists now it is not just based on the sound economic ideas and arguments offered, but also because he thinks these same ideas will:
    a) enrich him or his acquantances in the private sector (£100bn of contracts is no small amount of money on the table)
    b) yield results which will keep him in power (staying in power being far more important than whatever results come from the extra investment spending).

    Surely one of the most Machiavellian of Chancellors there has been. In fact looking over a few of Machiavelli's quotes, G.O conduct is strikingly close to M's teachings:

    Regarding austerity, cuts and general policy implementation timing:
    "Severities should be dealt out all at once, so that their suddenness may give less offense; benefits ought to be handed ought drop by drop, so that they may be relished the more."

    On tax credits:
    "The promise given was a necessity of the past: the word broken is a necessity of the present".

  3. Fully agree with Simon: George does not do economics, he does politics.
    Taking an idea before someone else and adapting it to enrich his future income and that of his parties donors.
    Probably benefit and health spending will still be austerity-prone, but better to get the bad stuff over before it gets entrenched into peoples minds for years, and lead into the new spendthrift ideas (sorry, investments) to generate a warm feeling just in time for the election.

  4. Why talk about how low interest rates are now on 30-year government bonds? Why don't we just finance significant infrastructure improvement by direct transfer from the central bank to the government? People/politicians are unlikely to make this sensible investment if it means adding to the national debt, regardless of how low the interest rate is. Thanks

    1. Because I think decisions about money creation should stay with the central bank, and at the moment the MPC are not creating any new money. Politicians used to have no problem adding to the national debt - the conditions for deficit fetishism are temporary and may even have already ended.

    2. Thanks for responding. Maybe you have seen Laurence Seidman (U.Delaware) "Stimulus without Debt" in Challenge Nov. 2013. He agrees with your first sentence and suggests that the government should politely ask the central bank if it would finance a deficit for a particular program. If the bank says no, the government can decide to go ahead and finance the deficit with bonds, or forget about it. This seems sensible to me. Writing as a non-economist in the U.S., I think people are much more worried about the national debt than you apparently believe. It's a huge motivator of bad fiscal policy; the main (but not only) rationale for inappropriate austerity all over the world.

    3. "Because I think decisions about money creation should stay with the central bank, and at the moment the MPC are not creating any new money. Politicians used to have no problem adding to the national debt - the conditions for deficit fetishism are temporary and may even have already ended."
      But that is just an ideological view from you. The only difference is no corporate welfare is paid. The politicians ARE creating money. It just looks like they are not.
      Fiscal policy is creating and destroying bits of paper. Monetary policy is swapping the different color (type) of paper.
      Besides I thought you said the move order does not matter and you were fine with it. So now we are onto politics not economics - we have different ideological views on the move order of things.
      As Nick says above, the "national debt" bamboozles people.

  5. "So how do you square £100bn extra public investment with the government’s goal of achieving surplus by 2019/20?"

    By hacking even further into expenditures which the conservatives consider unsustainable.


  6. I expect that £100 billion will be fronted by the Chinese on the promise that they can charge double the going rate in tolls in 10 years time. Borrow to spend on infrastructure at historically low interest rates? Will no-one think of the deficit!

  7. My view: Governments refrain from investing in public infrastructure because they´re waiting for TISA .
    Greetings, Jens

  8. Public investment is good, but it is not all we need - and should be treated like any other spending.

  9. Would the following situation be a negative impact or a positive impact and why? : What if we do not continue financing other thing and focus on significant infrastructure improvement by a direct transfer the the banks to the government. I understand how public investment is a good idea and beneficial, but why finance other things then?

    1. Your question caught my eye, as I scrolled through these similar types of assumptions. Your situation is valid, but for a big country that has many economic issues or affairs, it would be impractical only financing public investments because it would corrupt other economic areas of a country's economy. Imagine if the USA only financed public investment, that would mean trade would go down, and one principle of economics is that Trade Benefits All.
      Hope this helps
      Your friendly neighborhood Economist


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