Infrastructure Investment: Privatisation

George Osborne, ahead of Tuesday’s Autumn statement on the economy, has announced that there will be a £30bn investment in UK infrastructure. £25bn to come from pension funds and the China Investment Corporation and the remaining £5bn to be provided by central government funded by cuts elsewhere in the budget.

As a Keynesian, I favour a demand led approach but I also recognise that there is also a shortfall in the supply side, such as re-skilling of the unemployed. As Sam Bowman tweeted earlier: “Ha ha. £30 bn of infrastructure spending. Good one. That will help people to reskill for the future, won’t it? #jesuswept” I also recognise that the two are symbiotic, but that’s for another blogpost.

Investment in the UK infrastructure could be handled much better and it could also draw in more short-term capital for the Treasury. I’m referring to privatisation. Fixed Phone Lines, made of copper, need to be replaced by fibre optics to cope with increased demand on bandwidths due to a recent surge in people and products using and requiring broadband. BT currently has a de facto monopoly on this aspect of telecommunications infrastructure, with Virgin offering a cable based alternative in limited areas. The liberalisation that often comes with privatisation will provide more choice to the consumer, remove BT’s Universal Service Obligation as it has, in my opinion, failed in its obligation to provide access to advanced communications (broadband) across the nation, and create a more efficient broadband service thus aiding in growth.

Motorways could be sold off and made toll roads based on a Vignette. This would increase the immediate short-term access to capital that the UK government needs to reduce deficit and debt, remove its obligation for maintenance of the system and collect a revenue stream through a tax on the toll charges.

The attraction to these types of investment would be that the return of investment would be almost immediate and it would be of benefit to most of the citizens of this country. If the Chinese are looking to invest in the west, then the UK must be open to investment. With $410bn, that is a lot of capital to invest and the UK could do with all of it.

Retort to the Telegraph

On Friday, The Telegraph ‘reported’ on “Germany’s secret plans to derail a British referendum on the EU”. The plans aren’t that secret. The think tank, Open Europe, has provided an English translation of the document, entitled:  The future of the EU: Necessary integration policies for progress towards establishing a Stability union.

The document itself mainly concerns itself with changes to Article 126 of The Treaty of the Functioning of the European Union. Article_126 is largely about maintaining a resemblance of balanced budgets amongst member states.

The document proposes that paragraph 10 of Article 126 be deleted. Paragraph 10 states “The rights to bring actions provided for in Articles 258 and 259 may not be exercised within the framework of paragraphs 1 to 9 of this Article.”

Article 258 and Article 259 deal with legal proceedings being brought against a member state by either another member state or the Commission if a Treaty is deemed to have been broken.  This would allow direct intervention into the affairs of the offending member state by the Commission or, in this case, a European ‘Stability Commissioner’.

The crux of The Telegraph’s argument comes as a note at the bottom of the penultimate page.

“Limiting the effect of the treaty changes to the Eurozone states would make ratification easier, which would nevertheless be required by all EU member states (thereby less referenda could be necessary, which could also affect the UK).”

The proposals in the document are a change to a part of a treaty which only affects Eurozone members. However, as all treaties have to be ratified by members of the EU Britain would need to ratify the changes. The changes would only affect Britain if it were to join the Eurozone.

I recall the public being offered a referendum on Britain’s continued membership of the EU if there was a fundamental treaty change which affected its relationship with Europe. This proposed treaty change doesn’t affect Britain in the slightest.

The Budget, Spending Review and Fairness

It was once said that ‘Beauty is in the eye of the beholder’. The same could be said for fairness. What one calls ‘fair’, another calls ‘unfair’. With the June Budget and October Spending Review, many have called them unfair. The government, on the other hand, calls them fair.

The government, in trying to reduce the deficit, has cut spending, increased taxes for every section of society. On this basis it is fair. However, seeing as the deficit was caused because of the recession, and the recession was caused by the deregulation of the financial sector, ultimately, it is unfair that everyone is effected by the changes in fiscal policy. To be completely fair it should be the financial sector and policy makers that should pay the shortfall and eliminate the deficit.

However, to do so would be unwise as they will look to the other sections of society and say “why aren’t they involved? We gave them credit, it’s not our fault they can’t repay it.” And thus it escalates until you are left with a large proportion of society feeling slighted, bitter and, those that can, an exodus of talent and wealth.

However, the main problem with the June Budget and Comprehensive Spending Review is that the poorest 10% are the second worst off, in relation to the policy decisions, behind the richest 10%.

In terms of income lost, the bottom 10% loses 1.6%. The richest 10% loses 2.2%. The main problem with this is that the bottom 10% cannot afford to lose 0.1% of their income let alone 1.6%. This section is either in poverty, or near to poverty. The richest 10%, arguably, can afford to lose 2.2% of their income. The poor rely more on public services than the rich, altering the percentages of how the cuts effect the actual income of these groups. This is unfair.

However, if the rich were negatively effected too much by the policy decisions then there would be an exodus, a loss of tax revenues and more demand on the next richest 10% to pick up the shortfall left by the top richest 10%.

Whilst we agree with the principle that every person must play their part to reduce the deficit, we also believe it is unfair to place the burden on the polar extremities of the wealth spectrum. Whilst we believe the poorest 10% should not be let off, we believe their contribution to be too much. The burden should fall in relation to the ability to pay, much in the same way that credit is granted. We believe this to be fair.

However, fairness is in the eye of the beholder.