Sunak’s folly

The Chancellor’s rash splurge on infrastructure is a worrying sign that Britain’s economic policy is heading in the wrong direction

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“Economics is the science which studies human behaviour as a relationship between ends and scarce means which have alternative uses,” according to Lord Robbins, one of Britain’s leading free-market economists in the twentieth century, in his classic 1932 An Essay on the Nature and Significance of Economic Science. In other words, if a nation commits resources to one activity, it has fewer resources for another activity.

Further, the task of resource allocation is important. If resources are used in a low-productivity area of the economy rather than in another with high productivity, the average level of productivity is lower than it might have been. More bluntly, the nation is poorer. A key finding of traditional economics — from Adam Smith onwards — is that, with minimal or zero government interference, free markets are good at allocating resources.

All businesses confront the same costs for inputs of labour and capital. Entrepreneurs make most profit if they use these inputs in ways that generate the highest revenues, while the highest revenues come from satisfying consumer demand.

A general argument then follows for restricting the size of government spending, and expanding the private sector and consumer sovereignty. It was an argument that Margaret Thatcher and Keith Joseph understood and respected when they set up the Centre for Policy Studies in 1974 to counter the “corporatist” strand that had become dominant in British public policy.

The corporatists — of whom Edward Heath, prime minister from 1970 to 1974, was an example — believed that good things came from the state. In the corporatists’ view, the government’s job was not to limit government spending in order to create more scope for the private sector and its freedoms, but to manage a large public sector in the national interest.

Rishi Sunak’s first Budget is an insult to both Robbins’s definition of economics, and the vision of the economy and society that Thatcher and Joseph promoted. Vast sums of money are to be spent on public infrastructure.

On the eve of the Budget, the chancellor said: “By investing historic amounts in British innovation and world-class infrastructure, we will . . . lay the foundations for a decade of growth for everybody.” The apparent intention is to increase public investment on alleged “infrastructure and innovation” to the highest level — presumably relative to gross domestic product — since the 1950s.The obvious question is, “If the private sector were invited to finance these so-called ‘investments’ in infrastructure and innovation, would it be interested in doing so?” As far as such projects as HS2 is concerned, the answer is an obvious and emphatic “no”.

The largest supposed benefit from HS2 is the saving of time on travel between London and the North, like the assumedly valuable time of businesspeople. But businesspeople — in a market context — can indicate how much they appreciate this gain by paying for it. As anyone with a ha’porth of common sense knows, HS2’s prospective customers will not pay much more because the journey time to Birmingham is cut from one hour and 20 minutes to 52 minutes.

The Thatcher and Major years saw healthy productivity growth because government tried to avoid waste

The resources directed to HS2 are an almost paradigm case of resources being used in an area of low or even negative productivity. Sunak’s references to “British innovation and world-class infrastructure” are fluff. Yes, major additions to the nation’s infrastructure and stock of buildings were mooted during and after the Thatcher premiership, notably the Channel Tunnel and the Canary Wharf office development.

But in both cases it was private money that was at stake and — rather sadly — it was private money that was lost. The Thatcher and Major years were of healthy productivity growth precisely because government policy tried to avoid waste and blundering in the public sector, and to enhance the scope and efficiency of private sector investment. Public investment was limited and controlled, and the nation benefited from a better (if still imperfect) allocation of resources.

The Sunak infrastructure binge is the most worrying sign that economic policy under the Boris Johnson administration will take Britain in the wrong direction. The justification sometimes given is that the spending will be financed not from taxation but from borrowing, and at present borrowing costs are remarkably low. In recent weeks the ten-year yield on UK government bonds has sometimes been down to a mere ¼ per cent.

Is this not a unique opportunity for Boris Johnson and Rishi Sunak to stake their reputations, and to “lay the foundations of growth for everybody”, by initiating extra expenditure which — on the face of it — has little cost?

The mistake here is to assume that the financial terms of state borrowing are unaffected by its scale. Financial markets are fickle and cruel, and — as the Greek tragedy of the last decade has demonstrated — they can quickly change course. If the yield on government bonds were again to exceed 10 per cent, as it did in the 1980s, Mr Sunak might have to use his words on public investment with as much care as the politicians of a different and more responsible era.

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