HM Treasury hamstrings the Green Investment Bank
Yesterday, following his speech on the green economy, I asked the Deputy Prime Minister, Nick Clegg, why the new Green Investment Bank will not be allowed to borrow until 2015, and then only if debt targets have been met?
Of course, we all know the answer (it’s that building on Great George Street), but the point is that this arrangement is precisely wrong. If the debt targets are met by 2015, then the economy will be recovering and the greatest opportunities for the Green Investment Bank will have been missed.
The best time to invest in addressing market failures is precisely when economic activity is slow and the competition for natural and human resources is reduced. With output remaining below capacity and the cost of capital historically low, there is currently very little fear of ‘crowding out’ alternative investment, displacing jobs or pushing up wage inflation. Indeed, investment demand is so low that private surplus saving is at record levels and real interest rates close to zero, despite all that public borrowing.
The trouble is Mr Clegg is hamstrung by Treasury rules, which prevent the Green Investment Bank from being effective at precisely the time it could achieve the most.
And here’s the thing. Before it risks significant investment in policy-supported new markets, the private sector understandably wants the government to underwrite policy and regulatory risk which is within its control (but not within the private sector’s control). In other words, it wants the government to commit to its own policy by putting some skin in the game. Unfortunately, this is precisely what the Treasury is hell-bent to avoid. This is because such a commitment would be scored on its balance sheet and add to the deficit.
So even though early Green Investment Bank borrowing would leverage many multiples of increased productive investment, and create net assets, technical accounting rules are preventing small public investment at precisely the time when the returns to that investment are highest. In essence, those Treasury rules allow the Green Investment Bank to borrow in direct inverse proportion to how effective that borrowing would be.
The pressure to address the deficit is understandable, but the irony is that this back-to-front leverage might only delay the return to fiscal sustainability.