Ben Caldecott is an Associate Fellow of Bright Blue.
At the recent General Election, the Conservative Party promised to govern with a ‘long-term economic plan’ and made this a clear point of difference between itself and Labour. A majority Conservative Government must now work to incentivise long-termism throughout the economy – as endemic short-termism in the private and public sectors is a drag on economic growth, destroys our environment, and results in missed economic opportunities.
The Budget next week and decisions as part of the Comprehensive Spending Review can ensure that a genuinely long-term approach is realised. In a new report published yesterday from Bright Blue entitled, Green and Responsible Conservatism, I argue that this must extend beyond a narrow focus on deficit reduction – which is a necessary but not sufficient condition for embedding long-termism within the UK economy. Without a broader perspective it will be hard to reinvigorate our national productivity and competitiveness.
For example, it is now time for government to review its role in helping to finance productivity enhancing capital investments. Low UK productivity growth, the ultimate driver of long-run economic growth, is a major concern and new supply side investments and reforms are urgently required. While the amount of financing available for capital investments is returning to pre-crisis levels, the length of loans and the cost of capital have not. Financing is available for too short a period of time and is too expensive, which results in many potentially profitable and productive investment opportunities failing to go ahead.
Given the massive difference between long-term UK government borrowing costs and those available to private investors, it would make sense to pass on some of this difference in capital costs and length of loans to those making productivity-enhancing investments in social, physical, technological, and human capital. This is an unprecedented opportunity to reshape the UK economy and the Conservative Party should not waste it.
An approach could be based on existing instruments created by the Chancellor, namely the UK Guarantees Scheme for Infrastructure (the Scheme) and the UK Green Investment Bank (the GIB). Both of these policy instruments were created to help unlock financing for infrastructure, but both are constrained and should be unshackled – largely because of the need to comply with EU State Aid rules.
State development banks in other EU member states, such as KfW (originally Kreditanstalt für Wiederaufbau) in Germany, have block exemptions from these requirements as they were established prior to the EU existing and were folded into EU treaties and directives. The Scheme and the GIB should be similarly exempted so they can provide concessional finance and this should be on the agenda as part of the UK’s renegotiation with the EU. Providing concessional finance to sectors (as opposed to specific companies or ‘national champions’) through fair and competitive tendering processes open to all EU companies should not be prevented by Brussels.
Such a reform would allow lower cost capital to be invested in assets able to improve long-run productivity. Concessional finance can be disbursed through tenders, or by allocating funds to asset managers operating in selected sectors. This would be an important public policy tool able to accelerate investment in key areas. It could also improve the UK Government balance sheet: interest would be charged on finance provided and these rates would be above the Government’s own cost of capital, but below market rates.
Priorities for financing under the Scheme could include the Green Deal energy efficiency loans for households and businesses – each loan would automatically be folded into the Scheme, dramatically improving the attractiveness of the Green Deal. Projects eligible for Contracts-for-Difference (CfDs) – which underpin power generation investments – could also receive the option of a guarantee from the Scheme. Other priorities could be energy intensive industries – providing low cost finance for new technologies that improve the resource efficiency of industrial processes – and the deployment of a new national electric vehicle charging network. An offer of low cost capital could unlock the construction of an ambitious new UK electric vehicle charging network that would be privately owned and operated on a commercial basis.
Investments that are more resilient (for example, those future-proofed against flooding) and supportive of multiple government objectives (such as pollution and biodiversity) should be prioritised. HM Treasury, through Infrastructure UK, should determine these win-win opportunities together with the independent Committee on Climate Change and Natural Capital Committee.
There are ways in which the Government can enable important productivity enhancing investments, while minimising the direct role of the state, the impact on the public finances, and the risks of ‘picking winners’. A majority Conservative Government can deliver this, and get the appropriate balance between positive intervention and counter-productive market distortion.
These reforms, combined with other recommendations made in Green and Responsible Conservatism, can demonstrate that the Conservative Party is a reliable and trustworthy steward of not only the economy, but of the environment too. We can reinvigorate our national productivity and simultaneously benefit the natural environment, help address climate change, and improve our quality of life.