Jeremy Corbyn and John McDonnell at the Labour conference this week have trumpeted plans for £500bn of investment in infrastructure under a future Labour government.
And the economics author Paul Mason, who is close to the Labour leadership although he does not officially speak for the party, said on Sky News yesterday: “We can borrow it. And if we can’t borrow it we’ll print it”. The claim prompted the former shadow Chancellor, Chris Leslie, who was sitting next to Mason in the Sky studio, to wince as if in pain.
So are Labour really planning to print all that money?
No, which makes Mason’s claim a bit odd. In July McDonnell outlined plans to “mobilise” £500bn in infrastructure spending. He said this would be comprised of £250bn of government capital spending over 10 years and £100bn of state investment in a new publicly owned national investment bank and a new network of regional state-owned banks.
These banks would then borrow from the private capital markets to turn the £100bn of government capital into £250bn of lending to infrastructure projects.
So the government would have to borrow £350bn then?
Not necessarily – or at least not all of it. The £250bn of direct capital spending would be spread over 10 years. So that’s £25bn a year, which is actually less than the roughly £80bn of gross public sector investment (£32bn excluding capital depreciation) that the Conservatives are currently forecast to spend in 2019-20.
However, if the state’s budget deficit is not zero when Labour implemented this plan and they also tried to capitalise the new national infrastructure bank relatively rapidly then, yes, they would probably have to borrow from the capital markets by issuing new government bonds, or gilts.
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So is it a reckless plan, or “la la land” as the Daily Mail put it?
Not really. The Government's own national infrastructure plan identifies £483bn worth of projects that need investment by 2021, including massive new road, rail, sewage, housing and broadband investments. Many economists – including bodies such as the International Monetary Fund – argue that the UK has under-invested in infrastructure in recent decades.
And there’s the context of deep cuts to government infrastructure spending under George Osborne’s austerity. Public sector net investment was slashed 42 per cent in real terms in just four years. It fell from 3.4 per cent of GDP in 2009-10 to just 1.8 per cent in 2013-14.
And as Financial Times economics writer Martin Sandbu has pointed out, if overall investment in our economy (both public and private) had continued to rise on the pre-2010 trend the level would today be considerably higher. That implies a major investment gap has opened up. And some economists suspect that gap is one of the reasons our productivity performance has been so poor in recent years.
So what’s the issue here?
The independence of the Bank of England. There is no signal from the capital markets that investors are unwilling to buy government debt. In fact, the Government’s 10-year borrowing costs are currently close to all-time lows.
Yet some still argue that could rapidly change if a new Labour government came to power and that investors could suddenly refuse to lend to the British state except at penal rates.
Paul Mason saying that under such circumstances “we’ll print it” implies that Labour would be willing to ignore the central bank’s independence and order the Bank of England to print the money that the Government wanted to spend on infrastructure. That would potentially mean the end of the central bank’s independence, which is widely seen as a fundamental pillar of UK economic stability.
And if politicians are ordering the central bank to print money that could also mean they will go too far and cause a damaging surge of inflation, further undermining investor confidence in the UK.
John McDonnell and Jeremy Corbyn have said they would respect the Bank's operational independence. But comments like those of Mason throw that commitment into question.
But aren’t some economists saying the central bank should finance infrastructure?
They are. The argument is that Quantitative Easing (a fancy name for money printing) would be more effective if spent on real economy assets like infrastructure, rather than government bonds.
And there is a sense in which the Bank of England is even moving in this direction. In its latest £70bn round of QE launched in August to help the economy in the wake of the Brexit vote, the Bank said it would buy £10bn of the debt of major companies – something that it had previously resisted doing.
Some say that the Bank could buy special government infrastructure bonds, or the bonds of new banks, like Labour’s planned national infrastructure bank, which fund such projects.
Would this be “helicopter money”?
It could be. Many people think of helicopter money as central banks giving away newly printed money to households to spend in order to boost spending and growth when interest rates cannot go any lower and there is the threat of deflation.
But another variant is saying money will be printed to finance a certain element of government expenditure – such as infrastructure spending – rather than the Government raising debt to pay for it. This might have been what Paul Mason was thinking of when he made his remarks.
Whatever its economic merits, the deployment of helicopter money would constitute a profound change in the role of the Bank of England and would require extremely close cooperation with the Government. The terms of engagement would need to be very clearly set out.
There would also be a problem if the Government was in favour of the plan but the Governor of the Bank of England and its Monetary Policy Committee were opposed to the mechanism or did not believe the stimulus was necessary. The vexed issue of the Bank’s independence would inevitably arise.
But would helicopter money even be a good idea?
The case in favour of this, as made by economists such as Adair Turner, a former chair of the Financial Services Authority, is that it would boost demand in the economy at a time of weakness (and when interest rates can fall no further) but without creating more government debt.
Some critics, however, argue it would be simpler and more transparent for the Government to just fund the necessary infrastructure spending by raising debt.
Others say that helicopter money would probably be a slippery slope down into the valley of runaway inflation – especially if done by politicians at a time when the economy was not at serious risk of a deflationary recession or stagnation.
Paul Mason has clarified on Twitter that what he was advocating in regard to printing money was not Labour policy (though he wishes it were).
Paul says he wants to keep the Bank of England operationally independent but "overtly politicise its mandate" or "take political control of monetary policy".
He points to his lecture in April 2016 as a broader exposition of his thinking on monetary/fiscal policy:
Here is an edited version of the relevant passage which comes about 22 minutes in:
“It’s all very well having an independent central bank and we should keep it. But when monetary policy supports specific parts of the private sector, when it’s being used to specifically to finance the state, then whatever instruments the Bank buys, whatever kinds of debt or equity the Bank buys, it must be under the control of a democratically-elected politician….You could print £70bn worth of money and buy student loans. You could hold them to maturity. You could give a repayment holiday…If you control the central bank democratically you can do quite a lot you didn’t know you could do….I think Labour should keep the central bank independent, but it should set a tighter remit for the Governor. They do things but without any accountability or transparency….Once you’re into picking and choosing what you buy or which people you help it’s got to be a political decision. So I’m against helicopter money, I’m against giving everybody £10,000. I’m in favour of People’s QE, which is the allocation of specific parts of debt to specific projects – the Bank of England buys them and sits on them for 30 years…You might be thinking why risk a foray into a policy area that’s been depoliticised? Why not stick to our knitting? My argument is that fiscal policy has its limits unless supported by monetary expansion. You need the monetary side to be working for you.”Reuse content