How best to boost growth? Coalition debate sees Tories argue for supply-side reforms, Lib Dems pushing for new ‘pension infrastructure fund’

by Stephen Tall on November 15, 2011

As the OECD forecasts a sharp slowdown in global growth, the Coalition is re-examining old and new ideas to boost the economy here in the UK. And, judging by this report in The Guardian, the likely approach illustrates the impact of Lib Dem thinking within government…

The Coalition choice: Tory supply-side reforms OR…

One area that has been looked at to boost growth is supply-side reforms to free up the labour market, such as those championed by Conservative adviser Adrian Beecroft. The ‘Beecroft Report’ has urged radical reform, most controversially advocating the government to stimulate private industry to hire workers more easily by also making it easier for firms to shed jobs, for example by ending unfair dismissal claims. However, as the FT reported here, this proposal has been greeted frostily by Nick Clegg and Vince Cable:

Their most convincing argument is that there would be an immediate impact on consumer spending if people suddenly lost their job security and feared they could be sacked at any time.

A compromise has been looked at — limiting firms’ right to fire at will to young workers (which sounds discriminatory to me, though presumably government lawyers have examined this and found a loophole) — but again Nick is holding out, according to The Guardian’s report:

It is thought that Lib Dem leader Nick Clegg is resisting the compromise solution currently on the table that unfair dismissal be ended for young workers. The move could make employers more inclined to hire young people – on the basis that they were no longer scared of being locked into employment contracts they feared they might not be able to afford in months to come.

… OR Lib Dem infrastructure investment…

So with the Lib Dems checking these Tory proposals, what positive alternatives are being proposed in their stead? Here’s where some old ideas are being re-visited:

Ministers are finalising a radical plan to boost investment in UK infrastructure and stimulate the economy, with proposals to pool the vast assets held in British pension funds and use them to back an ambitious programme of road and house building. Pension and insurance funds are to be encouraged to invest up to £50bn in improving infrastructure, including private and social housing, power stations, super-fast broadband and motorway toll roads. …

Though pushed out by the Liberal Democrats on Sunday, the plan appears to have the support of ministers and officials across the coalition as they try to galvanise the economy without breaking the strict rules on public spending set out in the government’s deficit reduction plan. This would see them accused by the opposition of resorting to a “plan B”. It is understood the government will create a “pension infrastructure fund” as part of the growth review, due for publication on 29 November.

This idea was most recently put forward by Vince in a Centre Forum publication, Moving from the financial crisis to sustainable growth, available here, published two months ago, and the idea is also understood to be supported by the Tories’ Oliver Letwin. As Vince wrote then:

The government’s growth review is seeking to break through some of the most serious obstacles particularly where big complex projects – like the Atlantic Gateway on Merseyside; or the new deep water development on the Thames Estuary – are being held up by planning bottlenecks or by lack of coordination between agencies. There are roughly 30 to 40 major projects of this kind. But a more fundamental problem is finance. It has been estimated that roughly £200bn of investment has to be mobilised over the next five years to meet plausible estimates of capacity requirements, particularly in the energy sector. There is a large pool of capital in financial institutions like pension funds looking for long term investment opportunities with a reliable, utility return. The issue is how to channel this money into large scale infrastructure investments, and quickly.

It sounds as if the answer to that challenge is likely soon to be unveiled. But how could prove controversial, as The Guardian highlights:

It remains unresolved whether the funds contributing to the new pension infrastructure fund will take their own risk on the investment, with the prospect of good returns on their money, or whether the government will underwrite their investment. If the latter, the government will be adding liabilities to the public books, and it is thought this could be done off the balance sheet.

A decision to do that, however, would expose the government to accusations that it is repeating the tactics of the Blair-Brown years when, through public-private initiatives, the costs of improving state infrastructure were also left off the UK’s balance sheet. This comes alongside an expected major push on credit easing – where the Treasury buys company debt – which is also expected to be off balance sheet.

There’s certainly the risk of a double-standard here, though it strikes me the liability is of a different nature. Leveraging pension funds to invest in viable capital projects — ones in which foreign institutions are already investing — which it is expected will generate a return is (to my mind at least) very different to PFI projects in which the government took out a ‘mortgage’ on capital projects the full cost of which, borne by the taxpayer, will vastly exceed the original project cost. In the former there is an expected long-term financial gain; in the latter a known long-term financial cost. But it’s true, of course, that both are balance-sheet liabilities.