“Britain’s dilemma,’ as Lord Skidelsky writes regarding Localis’s newly launched report Credit Where Credit’s Due, “is that its economy craves investment but its politics mandates fiscal retrenchment”.
This is particularly in the case concerning infrastructure where the coalition has set out the goal of driving £250 billion worth of investment whilst eliminating a deficit that constitutes almost half this amount.
With 250,000 new houses needed per year, £22bn worth of money set to be lost by 2025 if current congestion on our roads continues, and our broadband network in urgent need of improvement, the need to invest is obvious. The question remains where, given the terms of reference laid out by central government, this money will come from.
A reasoned debate on what a Labour government would do in 2015 should be at the forefront of any debate on the left, but the fact also remains that – barring unforeseen circumstances – it will be at least three years before such an eventuality comes to pass.
So what, given present political realities, can be done in terms of helping driving investment – and jobs – now?
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As Sir Richard Leese, vice-chair of the Greater Manchester Combined Authority, notes in our report:
“Local authorities will need to be ever more inventive to find the finance necessary to boost local authorities.”
With capital grant declining, a need to use capital monies to fund revenue expenses, and council tax benefit being devolved to authorities whilst being top-sliced by 10%, these are indeed challenging times for local government.
The nature of the government’s deficit reduction programme aside, the fact remains that the budgetary deficit will not be cleared until 2017 at the earliest, and this will impinge upon any attempts to drive growth.
Our report, produced in partnership with Lloyds Banking Group, covers numerous aspects of local government finance from extended powers that could be given to local enterprise partnerships to a discussion as to how councils can most effectively use current incentives, such as the Community Infrastructure Levy and the New Homes Bonus.
It touches issues of particular interest to Labour authorities, such as the proposed Northern Hub railway network (and how bonds may potentially help fund this), and the recent City Deals awarded to six Labour controlled authorities. Innovative funding mechanisms for future infrastructure are highlighted in Manchester, Newcastle, and Nottingham councils, amongst others.
Arguably its standout finding concerns the creation of a new National Infrastructure Bank (NIB). Some form of state investment bank has long been a political ambition of the left – and has recently been discussed by Lord Mandelson, Ed Miliband, and other leading figures.
Though the Green Investment Bank is a start, its initial capitalisation of £3bn, limited powers of borrowing, and concentration on green projects (important though they are) limits its potential utility.
Yet there may be a way to marry the long-term ambitions of many on the left with the current goals of an administration, largely, of the centre-right. KfW in Germany and the Nordic Investment Bank also provide, as our report notes, continental examples of existing investment institutions the government may look to for inspiration.
An NIB, we contend, can be created here, and soon. Building upon recent discussions surrounding pension funds investing in infrastructure triggered by the chancellor’s comments in the autumn statement, we suggest that some combination of monies from quantitative easing and – should the professed aspirations of ministers such as Vince Cable be met – perhaps a new wealth tax, would produce an initial central capitalisation for a new NIB of £8bn.
This would be accompanied by the various local government pension schemes building upon their recent moves towards greater infrastructure investment by providing a further £4bn of up-front capital. Over four years both public and private pension funds would then purchase bonds to give this new institution up to £30bn to invest in varying forms.
All this requires a lead from the centre – not only in the creation of any new investment institution, but in encouraging private pension funds to invest in UK infrastructure per se. Less than 1% of UK pension fund assets invested in infrastructure would equate to more than £10bn worth of new money for roads, energy, waste and other areas sorely in need of such capital.
In this light, we argue, pension fund trustees need to take a wider view of their role. Certainly they have a need to maximise their investors’ return, but given BNY Mellon estimates the average weighted return for UK fund investments over the last five years has been around 3.2%, this may not, it seems, be best delivered through existing portfolios.
To put this in perspective, buying conventional government gilts would have produced a greater return at many points during this period.
“No more return to boom and boost” should not just entail investing capitalism’s surplus into the most profitable means in the short term (though doubtless this will continue to form part of any private fund’s strategy), but in helping deliver the infrastructure that will sustain the economy over the long run.
A National Infrastructure Bank would provide a secure instrument opportunity for private funds, whilst achieving a more sustainable economy over the long run.
It would deliver upon upon a key strand of Labour’s five point plan – bringing forward long-term investment projects to create jobs (perhaps also including a variant of point one of the plan, a wealth tax) – whilst providing a mechanism for the chancellor’s aim of driving investment through pension funds.
With Jesse Norman MP (Conservative, Hereford and South Herefordshire) noting in his foreword to Credit Where Credit’s Due that our NIB model “needs urgent consideration”, the appeal of the concept, it seems, is not necessarily the sole preserve of those on the left.
Across the Atlantic, President Obama’s proposed NIB has received significant bi-partisan support in the United States. With Labour seeking to restore its economic credibility by showing it can drive growth but still cut the deficit, the merits of a National Infrastructure Bank may prove a useful debate to have: both in terms of political positioning at present, and helping shape what may come to pass after 2015.
The NIB fits the terms of reference set out by the current government, whilst offering a new source of growth. As a permanent institution able to invest in a counter-cyclical manner, it also has considerable longer-term potential.