Introduction
Rachel Reeves is planning to ‘boost growth’ through mechanisms that owe their genesis to Private Finance Initiative and the EU approach, known as InvestEU. These are high-cost schemes funded with expensive debt, and which result in high costs for the general public. The high costs come through as either higher taxes, or high usage charges for toll bridges and roads, or dearer energy bills for comsuming the schemes’ product.
Chancellor’s proposals
Here are the Chancellor’s proposals:
https://www.gov.uk/government/news/chancellor-unveils-plan-to-turbocharge-investment-across-the-uk
Nottingham’s bankrupt and disastrous Robin Hood Energy project is the working model for when you combine unlimited funds with local Labour politicians devoid of business acumen. That approach will now be rolled out nationwide in Reeves’ Dash for Growth.
Here is the BBC’s take on Robin Hood Energy – https://www.bbc.co.uk/news/uk-england-nottinghamshire-54056695
We now know that one of the ‘investment’ plans is the disinterring of the corpse of Robin Hood Airport near Doncaster, in a Labour area of course.
Labour and SNP mayors will pick the winners and losers
Labour and SNP mayors will use their business expertise (!) to determine what schemes need to be constructed within their empires. The mayors in West Yorkshire, Greater Manchester, West Midlands, and Glasgow are experienced in maxing out on spending: they will delight in the popping-up of huge, new, and shiny ‘public assets’ within their domains, no matter that the assets fail to deliver long-term economic benefit.
The government’s announcement sashays neatly, in the case of the West Midlands mayoral authority, around the elephant in their room, which is Birmingham City Council. This authority is bankrupt after over-running in costs and time on an IT project and is requesting permission from the government to raise council tax by 9.9% this year, at the same time as making cuts of £153 million.
Supervising this fiasco will be Rachel Reeves and her sidekicks, and any number of quangos packed with Labour nomenklatura and trades unionists (the National Economic Development Council in the Wilson and Callaghan years, or the Industrial Strategy Advisory Council now). Would you trust them to pick the right sectors of the economy to invest in, and to support businesses that succeed? Can any business succeed in the dire economic environment that Labour has created?
Mayoral authorities will now be allowed to borrow
Rachel Reeves announced in her October Budget that these mayoral authorities will be granted their own borrowing powers: thanks to Margaret Thatcher we managed not only to severly limit the ability of local authorities to borrow other than from central government but also to cut down the number of Public non-financial corporations whose debts could track back onto the taxpayer (British Steel, British Rail, the National Coal Board, the General Post Office, British Leyland, British Shipbuilding, the Central Electricity Generating Board, British Gas, the regional water companies, and many, many more).
Now local authorities will be permitted to borrow from third-parties and privatisation is going into reverse.
Pork-barrel politics
This is simply another iteration of the tried-and-tested formula called ‘pork barrel politics’ – a Labour government making sure that all the goodies are enjoyed by Labour areas, whilst avoiding that these areas pay for it themselves. It will be a re-run of Gordon Brown’s Private Finance Initiative, which made schools and hospitals pop up in Labour areas at massive and continuing cost to all UK taxpayers, and in parallel Gordon Brown’s light-touch regulatory approach to the former building societies who were helping with the commercial and residential rebuilding of the UK’s rust belt.
Then it was bank depositors’ money that was being sprayed around; now the target is members of Defined Benefit and Defined Contribution pension schemes. These are the same people: savers.
Brown’s former building societies operated in Labour’s rust-belt areas in the Midlands, the North and Scotland, and were lionised and encouraged for their high growth and for their investments in ‘heartland areas’, until they all went bust in Gordon Brown’s UK financial crisis. Anyone remember Halifax Bank of Scotland (Rachel Reeves ought to), Northern Rock, Bradford&Bingley, and Alliance&Leicester? The rest of us are only just finishing with paying off the bill.
How these schemes work: a brief ‘sugar rush’ of growth followed by a long ‘cold turkey’ of repayments
The new schemes are inflationary in the short term, as huge amounts are borrowed and spent. The spending on goods and services adds to the Gross Domestic Product, giving an illusion of economic growth. The debt can be hidden within Labour’s new measure for the national debt – Public sector net liabilities.
The new debt is a new liability, and the scheme is a new public asset. Hey presto – the asset nets off against the debt. Labour can spend unlimited amounts within this model as long as the cash can be said to have been ‘invested’ in a ‘public asset’.
The problems only come into view when the asset is not completed, or is late, or does not produce what it is supposed to produce, or produces it but not at the targeted cost. Then the asset becomes a financial millstone on the public like Robin Hood Energy.
Even if the scheme comes onstream on time, in full and at the targeted cost, there is a sting in the medium term: the scheme must be put into the position of a monopoly supplier towards businesses and individuals, who must be forced into paying several lines of inflated costs – dressed up as usage charges, additions to bills, and taxes – so that the supplier can pay for the financing: the scheme is debt-funded and at premium rates of interest.
Rentier business models – why they are the lowest form of capitalism
The goods or services produced must be foisted on businesses and individuals and at whatever price keeps the supplier from failing. Businesses and individuals must be denied the choice to shop elsewhere or to not shop at all. This diminishes their wealth and spending power, and diminishes the funds available for productive investments.
The schemes are known in economic parlance as ‘rentier business models’: like a toll bridge, if you want to get from A to B, you must use the bridge and you must pay the toll, or ‘rent’. An economy in which such models predominate runs itself increasingly into the sand. Competition reduces. Investment monies are sucked into these low-risk/high-return schemes and away from high-risk/high-return alternatives. Innovation ceases. Entrepreneurship dies. Wealth creation goes into reverse.
The EU model – an expanding ‘state-directed’ sector and a diminishing privare sector
The EU/Eurozone economy is already such an economy: we won’t need any re-set to become just like them again, just to wait two or three years while Labour strut their funky stuff.
As the public sector – i.e. central government working hand-in-hand with regional government – has a strong hand in determining which sectors of the economy these rentier models arise in, what public policy objectives these models are supposed to meet, and how they are structured and financed, economic growth becomes concentrated into this third area of the economy beyond the ‘public’ and ‘private’ sectors, which we can call the ‘state-directed’ sector.
With the ‘public’ sector already being around 40% of the economy, it is not unthinkable that the ‘state-directed’ sector could grow to 30%. That would push the size of the private sector down to 30%, the same size as it was in the Soviet Union. The private sector ceases to be the economy’s engine: it is at best a trailer.
Private Finance Initiative and InvestEU
The financing model is the same as Private Finance Initiative and its nephew, the EU’s InvestEU programme. ‘Investors’ in these ‘state-directed’ schemes receive debt-style returns and, because of the involvement of public entities as guarantors of mezzanine and subordinated debt, and as writers of put options on shares, there is no genuine entrepreneur involved.
The returns on the debt-style investments are high enough: there is no need for an investor to take equity-style risk in order to enjoy high returns. Even if one made equity-style returns, they would be heavily taxed. The high returns for ‘investors’ on their debt-style investments require the imposition of inflated costs on businesses and individuals, which diminish their wealth.
Conclusion
All in all, a disaster for wealth creation and a guarantee that the UK and EU/Eurozone economies come into lockstep with one another in a form of three-legged race in which we all fall further behind the sprinting and unencumbered United States of America. Where can we all get a Green Card?