John McDonnell. Photo: Getty
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Bemoaning the cost of national debt is missing the point – we must invest in the economy

A country that stops investing in public infrastructure will find everything it does becomes more difficult.

The latest media fad seems to be to ask John McDonnell about the debt interest costs of his plans for additional borrowing to fund new public investment. Labour's shadow chancellor has said he cannot possibly know, because it depends on what interest will be in the future, and has also suggested that the question itself misses the point. This had led some to suggest he is not being transparent or even that he is not on top of his own proposals.  

But what McDonnell has said is right. He could make up a figure to keep the interviewer happy, but I suspect he doesn’t because the question is a political trap. Once you give a figure, then the response would be that with that money you could employ more nurses or teachers. It becomes a game that only has one winner. An impersonal and abstract idea – more public infrastructure investment – is put against whatever concrete spending the questioner chooses that will most resonate with their audience.

How often have we heard people say that we should reduce debt because the money spent on interest could be better spent on more nurses or teachers. It sounds plausible, because no one asks how we are going to get debt down. The recipe that people who complain about debt interest normally have to reduce debt is to spend less money on teachers and nurses.

Journalists should know better than to play this kind of game, because it encourages an anti-investment mentality. We can see much the same thing happen whenever the time comes for a spending squeeze (what economists call a fiscal consolidation).

It is almost always public investment that gets cut first. This is what happened in 2010 and 2011 under the Coalition government. Investment gets cut first because these cuts do not resonate with the public, and will be largely invisible to most people. Cut the number of teachers or nurses and the public will notice very quickly. Cut spending on new schools or hospitals or roads or railways and it is less immediately noticeable.

One of the things the Coalition government cut back on was investment in new flood defences. In 2007 the Pitt review said the government should rapidly increase investment in flood defences, because climate change was likely to bring a sharp increase in freak weather events. The Coalition government cut back that spending sharply in 2011 as part of its austerity programme.

No one noticed at the time. But ever since, almost every year, we have seen pictures of houses and shops ruined because of some “once in a century” weather event that brought flooding on a scale that existing defences could not cope with. Some of these floods would have been prevented if we had carried on investing more in flood defences.

For a government to always cut investment first is bad for the longer term health of the economy. In this sense, a government is just like a company. A firm that chooses to carry on working with the machinery it bought decades ago will not have to pay much debt interest, but it will gradually lose out to competitors that invest in more productive, efficient machines.

A country that stops investing in public infrastructure will find everything it does becomes more difficult. The private sector will get less productive, as roads become more congested. If the government puts less money into research and development, so will private sector firms. As the Budget made clear, the big problem for the UK since 2010 has not been the deficit, but poor productivity growth. Public investment, if it is well chosen, can help improve this.

Of course there have to be limits on public investment. But the way we judge an extra package of investment, like the one proposed by Labour ahead of the 2017 election, is not to ask how much the debt interest costs will be. No large firm judges whether to invest based on the size of interest payments on any borrowing. What it does is compare the return, which for the firm is additional profits, with the interest rate on borrowing. If the profit rate is sufficiently greater than the interest rate, the firm should invest. The same is true for government.

Looking at the debt interest costs of investment is wrong because it looks at just one side of the equation. If the investment the government undertakes increases economic growth, the government collects more taxes which could easily exceed the debt interest costs. When interest rates are as low as they are now, public sector investment can easily pay for itself. Even if it does not, it makes us all better off because average incomes will be higher.

Those who go on about debt interest are making a similar mistake to those who said we had to reduce the deficit rapidly in 2010, because otherwise the markets would stop buying our debt. Again, they were only looking at one side of the equation. The recession meant people were borrowing less and therefore saving more, so the demand for UK government debt was going up faster than the deficit increased the supply. We know that, because interest rates on UK government debt came down.

What about the idea that any extra borrowing in order to fund public investment needs to be paid off at some point. Again, this is an example of looking at just one side of the equation. Dynamic firms do not worry about paying off their debt if that borrowing allowed them to purchase productive assets to set against that debt. Exactly the same is true for the public sector. We still use roads and schools and hospitals that were built as a result of government borrowing many years ago.

For the last seven years, our economic policy has been run by those who have wanted to cut public spending and investment, and it has been a disaster. As the Budget forecasts showed, just as growth in the rest of the world is picking up, growth in the UK economy is slowing. In part that is a result of a failed strategy that has put cutting government debt, and debt interest, over and above the health of the economy.

It is now time to invest in the economy, and the media needs to recognise this. The question interviewers should ask is not what debt interest costs will be, but how politicians will pick the projects that will be good for the economy rather than white elephants.

 Simon Wren-Lewis is is Professor of Economic Policy in the Blavatnik School of Government at Oxford University, and a fellow of Merton College. He blogs at mainlymacro.

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Labour’s renationalisation plans look nothing like the 1970s

The Corbynistas are examining models such as Robin Hood Energy in Nottingham, Oldham credit union and John Lewis. 

A community energy company in Nottingham, a credit union in Oldham and, yes, Britain's most popular purveyor of wine coolers. No, this is not another diatribe about about consumer rip-offs. Quite the opposite – this esoteric range of innovative companies represent just a few of those which have come to the attention of the Labour leadership as they plot how to turn the abstract of one of their most popular ideas into a living, neo-liberal-shattering reality.

I am talking about nationalisation – or, more broadly, public ownership, which was the subject of a special conference this month staged by a Labour Party which has pledged to take back control of energy, water, rail and mail.

The form of nationalisation being talked about today at the top of the Labour Party looks very different to the model of state-owned and state-run services that existed in the 1970s, and the accompanying memories of delayed trains, leaves on the line and British rail fruitcake that was as hard as stone.

In John McDonnell and Jeremy Corbyn’s conference on "alternative models of ownership", the three firms mentioned were Robin Hood Energy in Nottingham, Oldham credit union and, of course, John Lewis. Each represents a different model of public ownership – as, of course, does the straightforward takeover of the East Coast rail line by the Labour government when National Express handed back the franchise in 2009.

Robin Hood is the first not-for-profit energy company set up a by a local authority in 70 years. It was created by Nottingham city council and counts Corbyn himself among its customers. It embodies the "municipal socialism" which innovative local politicians are delivering in an age of austerity and its tariffs delivers annual bills of £1,000 or slightly less for a typical household.

Credit unions share many of the values of community companies, even though they operate in a different manner, and are owned entirely by their customers, who are all members. The credit union model has been championed by Labour MPs for decades. 

Since the financial crisis, credit unions have worked with local authorities, and their supporters see them as ethical alternatives to the scourge of payday loans. The Oldham credit union, highlighted by McDonnell in a speech to councillors in 2016, offers loans from £50 upwards, no set-up costs and typically charges interest of around £75 on a £250 loan repaid over 18 months.

Credit unions have been transformed from what was once seen as a "poor man's bank" to serious and tech-savvy lenders where profits are still returned to customers as dividends.

Then there is John Lewis. The "never-knowingly undersold" department store is owned by its 84,000 staff, or "partners". The Tories have long cooed over its pledge to be a "successful business powered by its people and principles" while Labour approves of its policy of doling out bonuses to ordinary staff, rather than just those at the top. Last year John Lewis awarded a partnership bonus of £89.4m to its staff, which trade website Employee Benefits judged as worth more than three weeks' pay per person (although still less than previous top-ups).

To those of us on the left, it is a painful irony that when John Lewis finally made an entry into politics himself – in the shape of former managing director Andy Street – it was to seize the Birmingham mayoralty ahead of Labour's Sion Simon last year. (John Lewis the company remains apolitical.)

Another model attracting interest is Transport for London, currently controlled by Labour mayor Sadiq Khan. TfL may be a unique structure, but nevertheless trains feature heavily in the thinking of shadow ministers, whether Corbynista or soft left. They know that rail represents their best chance of quick nationalisation with public support, and have begun to spell out how it could be delivered.

Yes, the rhetoric is blunt, promising to take back control of our lines, but the plan is far more gradual. Rather than risk the cost and litigation of passing a law to cancel existing franchises, Labour would ask the Department for Transport to simply bring routes back in-house as each of the private sector deals expires over the next decade.

If Corbyn were to be a single-term prime minister, then a public-owned rail system would be one of the legacies he craves.

His scathing verdict on the health of privatised industries is well known but this month he put the case for the opposite when he addressed the Conference on Alternative Models of Ownership. Profits extracted from public services have been used to "line the pockets of shareholders" he declared. Services are better run when they are controlled by customers and workers, he added. "It is those people not share price speculators who are the real experts."

It is telling, however, that Labour's radical election manifesto did not mention nationalisation once. The phrase "public ownership" is used 10 times though. Perhaps it is a sign that while the leadership may have dumped New Labour "spin", it is not averse to softening its rhetoric when necessary.

So don't look to the past when considering what nationalisation and taking back control of public services might mean if Corbyn made it to Downing Street. The economic models of the 1970s are no more likely to make a comeback then the culinary trends for Blue Nun and creme brûlée.

Instead, if you want to know what public ownership might look like, then cast your gaze to Nottingham, Oldham and dozens more community companies around our country.

Peter Edwards was press secretary to a shadow chancellor, editor of LabourList and a parliamentary candidate in 2015 and 2017.