Scrutiny of the party manifestos has so far been focused on the differences in their “tax and spend” policies. But the approach to investment is just as important. As the economist Marianna Mazzucato said recently on BBC Newsnight, the UK economy desperately needs investment-led growth.
In fact, dealing with the UK’s chronic lack of investment is as important as getting the Brexit negotiations right – and much more important than balancing the books. Attempts to revive the UK economy since the financial crisis have so far simply inflated the prices of existing assets such as property and shares. Economic growth has been driven solely by an expansion of consumer credit, which builds domestic debt. This only stores up later economic problems. As I argue in the book, Public Policy Beyond the Financial Crisis, the UK needs an investment-led recovery that builds real value.
It is encouraging to see political manifestos for the general election that talk up national investment strategies – as the major parties do. But it is worrying when these ideas appear secondary to balancing the government deficit. Investment should be a bigger priority than a government surplus. UK investment is low and below average compared to its competitors.
New investment needed
Just before the election was called, the House of Commons Treasury Select Committee published evidence for its inquiry into monetary policy. Some of the evidence shows that the reason ordinary people have been left behind is because of the failure of policies such as quantitative easing where money was injected into the economy by the Bank of England purchasing financial assets. This is a link even Theresa May made in her speech at the most recent Conservative Party conference.
The criticism is that such policies help the rich get richer. By causing asset inflation, they increase inequality. Evidence submitted by the New Economics Foundation think tank tells of the need for productive investment. This is investment that creates new assets to strengthen the post-Brexit economy such as new housing, transport, renewable energy and digital technology.
Investment in this kind of new infrastructure is a reliable path to future economic growth and stability. As the UK starts the uncertainty of the Brexit process, a national investment strategy is the best hope for securing future growth.
What the manifestos say
The party manifestos take seriously the issue about getting investment to flow to the right productive places. The Conservatives promise a £23 billion National Productivity Investment Fund. It will target housing, R&D, skills and digital infrastructure. The policy promises to invest a total of £170 billion by 2022.
Labour say that borrowing will be used for investment. A National Transformation Fund will invest £250 billion over ten years. There is a commitment to sharing investment across all regions. A major priority is new railways. Low carbon energy generation also gets a mention, as does super fast broadband. The National Transformation Fund will be facilitated by a National Investment Bank. This will have a firm footing in the devolved regions. It will set the priorities for lending.
The Liberal Democrats commit to a £100 billion package of additional infrastructure investment. House building is a top priority with a target set of 300,000 new units per year. A British Housing and Infrastructure Bank is proposed as the vehicle to allocate this productive credit. Public money will attract private credit.
The Scottish National Party will introduce an investment fund for small and medium sized businesses with an overall focus on raising productivity. The Green Party wants investment to be targeted at community credit and local green investment.
Best chance for growth
It’s clear that investment is the best chance for economic growth. Yet much of the economic debate remains fixated on the size of the country’s budget deficit – with the major parties at pains to show how they will “balance the books”.
But a government surplus cannot even offer stability. In fact, economist Stephanie Kelton at the University of Missouri–Kansas City suggests that a surplus can lead to other problems. When the government is in surplus, an excess of credit flows to private investors. For example, the “Clinton surplus” of the 1990s is blamed for the private credit binge of the following decade. This resulted in the great financial crash.
Economists are closely watching the growing domestic credit growth in new government surplus countries such as Norway and Sweden. This credit flow does not necessarily feed productive growth. It often just pushes up house prices.
With parliament dissolved, the monetary policy inquiry is frozen, and the respected chair, Andrew Tyrie has stood down as an MP. Meanwhile, the prime minister’s election campaign is focused on Brexit and “strong and stable leadership”. There is a danger that the importance of changing monetary policy will be forgotten.
The mothballing of the Treasury Select Committee inquiry is disappointing to those who have been campaigning for new approaches to banking, credit allocation and investment. With some recent bad news about inflation overtaking wages, will Theresa May remember the important link between monetary policy and inequality?
The current election debates need to keep the review of monetary policy alive and move beyond a focus on fiscal credibility. The campaign group Positive Money is working hard to keep the issue on the election agenda. They ask the public to challenge candidates about the role of the Bank of England and monetary policy. Productive investment is what the British economy most needs at the present time.