Rushi Sunak has announced that National Savings & Investments (NS&I) will issue a £15 billion bond to fund green projects this autumn.
I have been arguing for bonds for precisely this reason for many years. With Colin Hines I have been one of very few to do so. So, it could be argued that I should be celebrating this. To some extent, I am. But, there are issues to discuss. Let me start with the detail; then I will move to the bigger issues.
First, why is the product going to be for three years only? How us it going to be repaid then? Why aren’t a whole range of products being made available now? Why such a narrow focus, in other words?
Second, what is the interest rate? This will determine the appeal of the bond.
Third, why won't this be available as an ISA product, which reduces the interest cost? ISAs also attract a large part of the savings market.
Fourth, why only £15 billion? The need for finance runs to hundreds of billions of pounds. Why the poverty of ambition?
Fifth, why too they limited suggested use of funds? And how will this be proved?
Sixth, will projects be abandoned if bond funding is not available? Is the fickleness of interest policy on these bonds to determine whether climate change can be tackled? If so, this is a mechanism for inaction, and that could be disastrous.
Seventh, is the commitment to these bonds for the long term? If not, what is the point of them?
And, eighth, is this bond going to be fitted into a bigger framework of macroeconomic management, or are they just a COP 26 gesture?
We do not know answers to these questions as yet. That we do not shows that this plan is clearly incompletely formulated in itself. That is deeply troubling. We need a policy that is for the long term; there is no evidence here that this is the case, and that is worrying.
That requires a move to the macroeconomic considerations. There are numerous of these as well.
First, it has to be said that there is no technical need for the government to raise a bond of this sort. As modern monetary theory (MMT) makes clear, all the money required to fund the green transition we need to have could be created by the government without involving tax or bonds, if it so wished. This has to be said.
Second, the political reality that the UK government does not have that wish has to be recognised. We can wish it otherwise, and campaign for it, but a government of the current political hue is unlikely to be persuaded right now, and there is little sign that Labour is much different, or the SNP, come to that.
Third, let’s also be clear that even if money can be created there are reasons to control inflation when creating money in the scale that the green transition requires. This in itself can mean a bond might be required. MMT proponents cannot deny this.
Fourth, as I have now noted time and again, whilst a government can create money at will, every pound of deficit spending creates a new pound of private wealth. This would be no problem if that money stuck with those who got the immediate benefit of that spend - who will be delivering the Green New Deal - but that is not the way multipliers work. The money, as the evidence of savings over the last year shows, largely ends up with those already wealthy. If there is no desire to tax wealth - and there is not, whether we like it or not - then this has a massive disruptive impact on the economy. The stock market overheats; house prices boom; speculation is too well rewarded. And that is what is happening in the UK economy now. That is why a bond can play a serious part in muting the economy in a way that nothing else can in that situation. The bond does not as such fund the required work, but it can mean that the money injected into the economy is withdrawn from the speculative economy, and that is the real advantage. This might also mute the impact on inequality, albeit that harder to prove given the modest amount involved here. But, that does not negate the benefit.
Fifth, without contradicting the fourth point, there is another argument or narrative that can help, and narratives matter in economics. That is that it can be suggested that this money is capital. I don’t wholly buy this narrative: saving bonds of this duration can’t really be capital. However, they can pave the way towards something which really could be capital. There is a real benefit to thinking about the nature and use of capital in this context because a great deal of capital is going to have to be committed to the Green New Deal, like it or not. This bond is not an answer in itself on that issue, but if it opens a narrative it is useful.
I have seen some, especially from the MMT community attacking this bond as wholly unnecessary. Technically that could be said to be true. But this is not a purely technical world. If MMT wants to be as irrelevant to real world decision making as neoliberal thinking is then it can promote such narratives. But in the real world of political economy where much broader matters are taken into account this bond is a step forward. It is one with some reservations attached to it, but it is a step forward nonetheless. And I take those step forwards as a gain, because in political economy we know pure economics is not always closely related to achieving real world success, and that is what I want.
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I think that you are right. There must be some interesting discussions going in the Treasury with the Chancellor.
But even if this is a step in the right direction, it still pains me to see it hobbled by Neo-liberal prejudices and end up not being as potentially effective as it could be.
And that’s done on purpose. It’s that bit I don’t like – the inbuilt half heartedness of it all.
As I say, far from ideal, but we are in a far from ideal world
What will the money raised through the “green bond” be spent on? Who decides what projects?
I’m doing a couple of renewable and storage projects at the moment. One has a good IRR, we will not have problems raising finance from the money men. Other projects have problems with gov’ regulation (ha!), which mitigate against integrated (i.e. renewable generation and storage projects that use the existing distribution networks) projects. Suucessive governments (& Ofgem) have seen how the “wind is blowing” for more than 10 years and have done… almost nothing with respect to renewables and regulation concerning network access. At least with respect to renewables, the problem continues to be regulation, not money (partly confirmed by meetings with the likes of Goldmans who told me they were only interested in projects with kick-off value of £500 million)..
So far these comments apply to the power side. In parallel to this, there needs to be investment in energy efficiency measures. There are a number of problems in this area, not least: very long pay-back times (if at all) and equity issues. There is a highly acrimonious debate going on in the EU with respect to extending carbon markets to transport and heating. There is also a debate on how to persuade people, living in quite valueable properties, to make an investmetn in those properties that is quite small (relative to capital value) to move the properties to much lower levels of energy-for-heating consumption – which in turn opens the door to low/zero carbon heating. The other equity issue is what about poor people living in thermally leaky houses (owned or rented). Which brings us nicely back to £15bn or whatever… what is it spent on? Should landlords get grants to thermally renovate their houses (socialism for capitalists?) .
Covid has shown that the current gov rabble are very poor at organising anything apart from money-for-chums. They also show a prediliction for spending money on greenwash projects (the blue H2 project on the east coast being a good example). I’m not saying – don’t raise the money, I do wonder given current circumstances and the above, what it will be spent on. Apologies if I sound like Eyore.
The lack of energy saving really worries me too
[…] another post this morning I made the comment that in many areas there are purists who think that there are perfect outcomes […]
You are right to cautious – this government’s track record requires anything to be examined in a cynical way.
I am more optimistic. Clearly, this type of policy is not in the DNA of ANY Tory government so to expect them to embrace Green Bonds “Hook, line and sinker” is unrealistic. The fact they have made any move at all is positive and, when the policy proves to be a big hit (and it will), they will increase its size and scope. Moreover, it is Labour’s chance to move more strongly in the right direction on this issue. The barriers have given way to, first, a trickle…. but soon a flood (if that is not too disturbing a phrase in the face of the Climate Emergency!)
On the MMT aspects I do wonder whether some commentators live in the real world…. but even in a theoretical world Green Bonds make sense. Central to MMT is inflation control and we DO have inflation – ASSET PRICE inflation. MMT requires a policy to be implemented to contain that asset inflation and Green Bonds do that. There is a broad discussion to be had about exactly what that looks like – balancing interest rate levels, QE, Gilt issuance, taxation, spending etc. but the MMT Taliban seem to see life in only one dimension.
Agreed
Why bother with borrowing anyway? Unless you think inflation is a problem and you want to take money away from the economy? We can just print, that’s what’s being happening.. it’s just signalling
Inflation IS a problem – well, more precisely ASSET price inflation. So, we need to find a way to drain money out of the system that will cool housing/stock markets without destroying the real, productive economy. Green bonds are part of the solution to this problem.
Correct
Interestingly we seem to be arriving at a sort of heterodox MMT….
Whereas the answer to how do you stop inflation used to be simply ‘raise taxes’, we can now also suggest that well targeted issue of some hypothecated bonds could do the job instead – or as well.
The MMT Taliban WILL be cross!
🙂
You have created ideological confusion in the Tory ranks, Richard. The giveaway is the 15billion limit. The logic of such a bond had become overwhelming, but so too is the fear that it will succeed on the level you suggested and THAT would bring the role of the state back to centre stage. An arbitrary low limit addresses the risk, as will the interest rate. It would also, perhaps, revive the suppressed discussion on the insanity of pouring QE funds into so-called liquidity (financing speculation) rather than directly into infrastructure projects. These are profound questions, but frightening ones for the neo libs.