If The Next Government Isn’t Diverting Resources To Investment Then It Will Be Giving Up On Our Future

By Simon Wren-Lewis, January 9, 2024

Simon Wren-Lewis is Emeritus Professor of Economics and Fellow of Merton College, University of Oxford.

To prove you are not a robot, click on the cars in this picture.

You might be surprised that this blog has featured the causes and consequences of flooding over half a dozen times. However this is the first time I have been able to illustrate one of these posts with a picture taken five minutes walk from my home. In case you are wondering, there are unfortunately three cars in this picture, almost completely submerged by flood water.

Flooding and the damage it causes illustrate three themes that run through this blog. The first is the harm caused by governments trying to hit arbitrary and unnecessary financial targets by cutting back on public investment. The 2010 Coalition government cut back spending on flood defences sharply, and we see the consequences of that almost every year when we get high levels of rainfall. The second is that most of the media invariably fails to hold politicians to account for these failures, either by choice or because the broadcast media prioritises getting reporters in front of flood waters over briefing them properly.

The third theme is the ability to ignore or forget expertise. In 2007 the Pitt review concluded that climate change would create more and more of the kind of events we saw last week (essentially because a warmer temperature means that clouds can hold more water), and while the Labour government acted on Pitt's recommendations by increasing flood prevention spending substantially, the review was ignored by subsequent governments and largely forgotten by the media. As we saw with austerity, Brexit and Covid, it is very easy for governments to do things that a majority (or even almost all) experts think is foolish, and yet much of the broadcast media thinks its job is to present Westminster gossip or political debates rather than inform its viewers about the knowledge we have. The BBC’s cut in funding for Newsnight is just the latest example of how it is ignoring its mission.

In this post I want to use flooding as an example of a fourth theme that I am bound to return to time and again over the next few years, and that is the scale of extra public investment, and incentives for private investment, that are now required. My last post talked about greening the economy to get cheaper and more sustainable energy. Flooding, and how to mitigate its effects, is an example of adaptation to the climate change we have already created and are bound to create in the future however quickly we green the economy.

Unfortunately climate change is just one of a growing list of problems that require more investment. The Covid pandemic demonstrated the need for additional capacity within the existing health system to rapidly scale up its ability to test and trace new viruses. Those countries, like South Korea, that had already invested in this capacity did far better at saving lives than most other countries. Yet, as John-Burn-Murdoch showed here, the NHS has been deliberately starved of investment since 2010, as has spending on preventative care. As a result, we need massive investment in health just to catch up to where we should be, let alone help us deal with any future pandemic. [1] In addition, we need to make our public buildings (especially schools) more resistant to airborne disease transmission.

More than ever, we need the popular narrative on what governments should do to move from obsessing about government debt to obsessing about public investment. We owe it to future generations to mitigate the impact of climate change, prevent worsening climate change and deal better with future pandemics. Not doing so would saddle these generations with a burden far greater than paying a bit more interest on government debt.

However it is equally foolish to pretend that investment on this scale is costless in economic and political terms. With the major economies, like the UK, working at or near to a non-inflationary maximum, additional public and private investment requires a significant shift of resources from private consumption. As Martin Sandbu noted here, democracies are not well set up for such shifts outside periods of war. Instead politicians prefer incremental changes, where losers can be compensated if necessary. But as he also writes, “what choice do we have” if we want to avoid leaving far greater problems for future generations.

While higher public spending on day to day activities in such situations requires higher taxes, higher levels of investment paid for by borrowing will require interest rates to be higher than they otherwise would have been to free up resources for that investment. [2] We can already see the battle lines of the next election reflecting this, with the Conservatives saying that Labour’s “reckless” (meaning very necessary and beneficial) additional green investment will push up mortgage rates. This line to take may not gain much immediate traction because people remember the results of Liz Truss’s little adventure as PM, but it will remain an attack against any government that dares to invest.

If a future government does prioritise public investment over reducing its debt and keeping interest rates low, the biggest threat it will face is from simplistic (“populist”) political attacks which suggest that you can cut taxes while maintaining public services, invest without borrowing and attract the labour industry needs without immigration. It is therefore imperative that all parts of society begin to see the benefits from additional investment, particularly those areas that have been neglected in the past. This, in turn brings us an additional reason why public investment in the UK has to be much higher, and that is improving transport infrastructure outside London.

The United States under Biden not only shows what can be done, but the political fragility of any attempt to invest in the future. The Inflation Reduction Act has been stunningly successful at using public money to mobilise private investment to green the economy. Partly as a result, the US economy is much stronger than most other major economies, and inflation is coming down with the soft landing theory predicted was possible but which many economists thought improbable. Yet Biden is getting little credit for all this. Instead political commentators obsess about his age, and polls suggest a close race with would-be dictator Trump.

Flooding in the UK is inevitable, but the scale of damage it inflicts is not. Climate change is inevitable, but its extent and destruction it creates is not. At some point another pandemic is bound to happen, but how much illness and death it causes is a choice society makes. To have any hope of making the right choices requires cooperation within and between societies with governments taking the lead in investing today. It requires a relatively small current sacrifice for a far greater future gain. The ability to do that is part of our humanity, but unfortunately so is tribal division, falling for charisma and believing we can return to a romanticised past.

Footnotes

[1] We also, of course, need to spend more day to day on health, including paying NHS staff much better, but while investment spending should come from borrowing current spending should be paid for by raising taxes. For this reason I don’t think taxes on working people in the UK should be lower.

[2] There are two reasons why interest rates will raise. The first, and most likely, is that higher demand for labour (because investment increases) will lead the central bank to raise short term interest rates to head off inflationary pressure. This in itself will raise long term interest rates, including interest rates on government debt, by at most the increase in short term rates. The second, and less likely, is that long term interest rates on government borrowing will rise just because the government is borrowing more.