I spent a lot of time yesterday talking about what Jeremy Corbyn has called People's Quantitative Easing, which I had previously called Green Infrastructure Quantitative Easing. I thought it might be relevant to provide an example where this might work.
The Guardian reported at the weekend that:
The Scottish government's flagship programme to have billions of pounds poured into privately financed roads, schools, colleges and hospitals has suffered a major setback after running foul of EU borrowing rules.
John Swinney, the Scottish finance secretary, has been forced to launch a major review of his government's entire private financing strategy, after the Office for National Statistics (ONS) stated on Friday that the biggest scheme — a £1.5bn bypass around Aberdeen — had to be counted as a public asset.
The Guardian revealed earlier this week that at least 24 prestigious projects in Scotland, which would have lifetime borrowing and maintenance costs of up to £10bn over the next 35 years, were being restructured and delayed as a result of the new tests imposed on privately financed projects by the EU statistics agency, Eurostat.
Based on Eurostat's new tests, the ONS has now ruled that the Aberdeen western peripheral route (AWPR), a 58km (36-mile) dual carriageway around the city currently under construction, is a publicly owned and controlled project and not, as Scottish ministers had argued, a private scheme.
Let me be clear, as usual, that I am not interested in the party politics of this, if there are any: it is the principles that matter to me. Three issues arise here.
The first is that to secure the investment Scotland needs that was otherwise unavailable to it the Scottish government has had to resort to PFI schemes, which are absurdly expensive when government borrowing is available at about 2% per annum at present. These schemes makes no economic sense at all.
Second, to achieve that goal and beat the paranoia about public debt that weighs down all political debate in the UK it has sought to use artifice to argue that these are not public schemes at all. I do not blame them for doing so, but it is absurd that accounting rules mixed with wholly mistaken understanding of the nature of debt force it into this position at real cost to the public.
Third, the Scottish government is now landed in the position that this is all cost and no gain.
And this is precisely what People's QE (or GIQE) is intended to solve. There is a real need for investment in Scotland. It should be possible for the government to deliver what is so clearly needed, especially when government borrowing is cheap (in contrast to PFI) and the spare capacity to build these resources is readily available. If bonds to fund these schemes had been created, sold to banks and then been repurchased by the Bank of England the funding could have been provided at vastly lower cost than PFI; the finance sector's exploitation of infrastructure projects (almost always via offshore companies) could have been eliminated; the private construction sector would still have gained; the projects would have been built at least as efficiently and the cost in the long term, where under People's QE no interest need be charged as the funding is, quite literally, created by the Bank of England out of thin air, would be negligible. Instead Scotland will be burdened by these projects for years to come.
And, as I noted yesterday, the EU and Bank of England have already made clear that this is entirely legal.
If that does not make the case for this form of QE I ma not sure what does. Isn't getting rid of PFI enough in itself to justify its use?
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I’m fully in favour of what you’re hoping to achieve with PQE, but, in my view it needs considerable devolution and decentralisation of revenue-raising powers to the various bodies issuing bonds to ensure they have the wherewithal to service coupon payments – and that’s assuming they can be rolled over continuously. The second issue I have is that doing this in one country while there is a fiscal deficit will attract the attention of the bond vigilantes who will drive gilt yields through the roof. The existing banks and the shadow banks will do their best to strangle this policy at birth – and they will have the full support of the Tories, the remaining Blairites and the right-wing press.
It would be far better to promote this approach and to secure support among all other EU social democratic parties. Capital market participants have the ability to pick off one country, but they’ll think twice if they’re confronting the political will of the EU backed by the ECB in concert with the central banks of no-Euro members. Mario Draghi’s declaration to do what it takes to protect the Euro put the bullies in the international capital market in their place. In addition, what is required is a recasting of government accounts from the current ‘tennis club’ accounts they use to proper income and funds flow statements and balance sheets. It would then be possible to separate borrowing and funding for current expenditure from that for capital expenditure and facilitate efficient financing of the latter.
The EU is already doing this
The bond vigilantes have been remarkably powerless
And servicing a coupon rate is easy – if it has to be done the agency is given the money to do so by central government to whom it comes straight back
But I agree with you on accounts
I think you’re pushing it a bit to say the EU is already doing it. If you’re talking about J-C Juncker’s magic €300+ investment fund this is being leveraged off very modest injections from the EIB and the reallocation of existing EU budget funds via this strategic fund initiative. The idea is that once these institutions do the necessary due diligence other providers of finance will sign up. The World Bank Group often does this using its MIGA and IFC affiliates. But it’s not the monetary financing you seem to think. The Euro Area (and non-EA members) prohibition on monetary financing remains intact. It’s true that Draghi has the authority to buy bonds of EA member governments under attack from the bond vigilantes. But they’re not stupid. They won’t take him on. In theory there is no limit to how much money he can print to buy bonds. So it’s just really a threat.
The QE being practised by the Fed, BoE and the ECB can be and will be reversed. That is the problem with the monetary financing you propose. Once you start down that road it becomes politically impossible to stop or reverse when the problem it was designed to remedy has been addressed and inflation is seriously licking off. We’ve seen this movie before and it wasn’t fun. Highlighting Mr. Corbyn’s unassailable integrity doesn’t cut it.
There is no question but that there is a serious requirement for investment in physical and human capital and for efficient financing of this investment. But, instead of monetary financing, the best way is to separate current fiscal receipts and expenditure from the financing of public investment, to use some rebalancing of tax expenditures and direct public expenditures between the old and the young and some revision of tax incidence and enforcement to close the current fiscal deficit and, while the economy is growing, to issue bonds to finance capital expenditure. There is a also a place for government guarantees of investment in the privatised sectors with increased powers for the regulators to demand delivery of the required investment at a suitably low cost of capital.
If you think the current QE programmes will be reversed you are living in cloud cuckoo land
Who is going to buy that debt if they are reversed
Why would any government want to drain its economy of growth by doing so?
Sorry – but such a claim is fantasy land
I deal with reality
Third, the Scottish government is now landed in the position that this is all cost and no gain.
…and fourth, PFI is one of the easiest ways of all to take money out of the UK economy and deposit it into tax havens. Mapeley Steps is the most obvious case, but there are many others. PFI belongs in history’s dustbin.
And when hospitals et al. were being opened in their localities, MPs of all colours cheered on the PFI model as it ‘got shiny new ‘X’ built in town ‘Y”. Seems PFI – created by the Blues – is yet another legacy of Brown that we’ll be paying for decades to come.
Yes.
But there is very little money in it for the political “donors”
Thank you, Richard, for taking the time to engage with (some of) the points I’ve made. I can only admire your apparently ceaselsss activity on so many fronts. I accept there is a strong temptation for the central banks to write off their QE bond holdings and to perform some ex post monetary financing. But I retain strong reservations about the monetary financing you are proposing (and which Jeremy Corbyn apparently has adopted), despite the pressing need for the investment it is proposed to finance. There are other ways of securing efficient financing of investment – and I would prefer to explore and apply these without resorting to direct monetary financing. I fear this advocacy of direct monetary financing is the issue which may derail Jeremy Corbyn’s campaign. And if it doesn’t and he wins, continuing to advance it will contribute to a Labour defeat in 2020.
So, what are the alternatives?
And how will they work?
I’ve indicated some aspects of alternative approaches in my comments. In addition, there is the potential to establish statutory collective buyers of, for example, electricity and gas supplies for households choosing to deal with the profit-gouging energy suppliers using such an entity. This would be far more effective than the intended-to-fail proposal of a ‘regulated safeguard tariff’ to protect household consumers from being ripped off that is being advanced by the Competition and Markets Authority (CMA) as one of its key proposed remedies arising from its energy market investigation. In addition to imposing some discipline on these rip-off merchants it would re-establish the collective funding of the provision of energy services by final consumers and reduce the risk and cost of investment. Variants of this approach may be applied across the entire utility and infrastructure service sectors.
But it appears that monetary financing of public investment is the preferred option so it’s obvious I’m wasting my time trying to tease out options and variants.
That’s interesting – I like it
But how would you deal with investment? It’s a fair question in view of what you have said
For example, in the electricity sector the Government is in effect the central buyer of generation capacity. DECC currently runs some half-baked capacity auctions for some capacity and sets strike prices in CfDs for more capacity such as nuclear. The CMA, to its credit, has made some recommendations about this process that should reduce the cost for final consumers. The statutory collective energy buyer I am proposing should be a formal party to this process to assert that final consumers are collectively underpinning any investment and to ensure both that investment is sufficient to maintain a safe and efficient supply and that they aren’t being ripped off. Similarly, for the electricity and gas networks, Ofgem agrees the quantum of investment required with the networks but awards them an excessive cost of capital. The statutory collective energy buyer should have a formal role in the regulatory process to protect final consumers.
All of the economic regulators should operate in a quasi-judicial role as they do in the US striking a balance between the interests of investors and consumers – with final consumers and service-users being formally represented by statutory collective bodies.
The British model of regulation and competition in the utility and infrastructure service sectors is seriously flawed – and, what is worse, it has infected the process throughout the EU. Final consumers and service users are being atomised, individualised, disenfranchised and ripped off, even though collectively they fund the entire provision of services. They need to be collectively represented in a statutory manner. Again this is something that needs to be tackled by Labour and its sister parties in the EU. A solo run by one party, even in one of the major countries, won’t work. The major suppliers of these services operate across EU internal borders. They can be brought to heel only by pan-European, political, consumers and regulatory processes. That in reality is probably the most effective argument for remaining in the EU.
Paul
Thanks for this
I will bear all this in mind
Really useful
Thanks
Richard
Richard,
I’m pleased you find it of some interet. I’ve made a submission in response to the CMA’s provisional findings and proposed remedies for the electricity and gas markets. The deadline is today and it should appear on the CMA’s web-site along with those of other interested parties. My submission focuses on the rationale for a statutory National Electricity and Gas Buyers’ Collective. Re-empowering citizens and residents against the predations of the big companies is crucial. Securing necessary investment financed at the least cost of capital follows on from this.