The most recent edition of the Economist magazine argued that publicly funded investment in infrastructure is currently too low in a number of rich countries, including the UK and US. With interest rates on government debt continuing to run at very low levels, the case for public borrowing to fund such investment would seem clear.
Investment in public goods such as infrastructure, education and scientific research which can generate social returns to the economy much higher than the initial outlay will always be needed over time to sustain economic growth and prosperity. In the UK during the years before the financial crisis, successive Labour governments made efforts to increase public investment, often using private funding (the PFI) in order to make up the backlog that had accumulated under previous Conservative administrations. With the turn towards austerity in 2010 which had been backed by both major parties, public investment has arguably been too low, and became an easy target for government cuts. In the longer term, this kind of policy undermines economic growth and can only prove to be a false economy. With slower growth in the private sector, which relies on public goods for its own growth in productivity and output, tax receipts are likely to be lower on average, and unemployment potentially higher, which would tend to weaken the government finances.
Public investment need not be on expensive projects, and indeed lower cost maintenance or improvements, while not tending to make the headlines which politicians often love to create, can be just as effective in supporting social infrastructure and national prosperity. Improved road surfacing, railway maintenance, and flood defences are good examples of this.
Arguments in economics against public borrowing tend to focus on its potential to crowd out private investment through its impact on interest rates, and on the alleged inefficiency of public as opposed to private sector decision-making and investment allocation. If there is a fixed market for investment funds, increased public borrowing could lead to higher rates, increasing the cost for private sector investors and leading them to reduce their own investment spending. However, even in the UK, with a high level of employment, long-term interest rates remain at very low levels. There has thus been a case for a significant rises in public investment for some time, given the low rates which have persisted since 2009. The UK, US and Germany, three of the largest economies in the world, all have a decaying public infrastructure and would benefit from substantial increases in public investment. In these cases, public investment can ‘crowd in’ private investment by generating improved prospects for private sector activity. For example, better transport links between certain regions could lead to rising levels of trade in goods and services.
Arguments against public borrowing, especially for funding investment, often prove to be inconsistent. Economists who make this case will often support borrowing by households for a mortgage or university education, or by private firms to fund their own investment in new capacity. Why should the case supporting public investment be any different? It may simply represent a bias against state intervention in the economy. While such arguments can always draw on public projects which have turned out to be ‘white elephants’, the need for public goods, which under capitalism have to be provided directly or indirectly by the state, will remain.
In the UK, the left-wing Labour leadership contender, Jeremy Corbyn, has argued the case for a ‘people’s Quantitative Easing’, using an expansion of base money (known as M0) by the central bank to fund a National Investment Bank which would oversee a large rise in public investment. The QE part of his plan is arguably unnecessary, if the economy remains at the zero lower bound, which will significantly reduce the cost of an increase in public borrowing. Even in the most recent general election, Labour’s plans for austerity only applied to the current government budget and allowed for increased borrowing to fund investment. This was backed by the Economist magazine as well as many mainstream economists as more sensible than the Tories’ plan which fails to distinguish current from capital spending by the government. Their plan will tend to impart a downward bias to public investment which, as already mentioned, is an easy target for short-term cuts, but will prove damaging over the longer term.
Public investment could still reduce private sector profits and potential private investment if it is funded by taxation. Depending on which taxes are used to fund the rise in spending, the taxation incidence (where the costs fall) will vary. It could equally reduce private sector wages or lead to a rise in prices. But given the necessity over the long-term for public investment, it has to be carried out at some point, and extremely low interest rates on the public debt give governments an excellent opportunity to do so by borrowing at a relatively small cost. The current case for a substantial increase would seem to be overwhelming.