×

UK government told: ‘You can borrow for free, so get spending’

British Prime Minister Theresa May
Chris Ratcliffe | Bloomberg | Getty Images
British Prime Minister Theresa May

The U.K. government is being told to increase spending on infrastructure projects to help offset any slowdown following the country's decision to leave the European Union.

"With interest rates at historic lows, essentially the government can borrow for free," Jonathan Portes, economist and fellow at the National Institute of Economic and Social Research, told CNBC via email.

"It has been obvious to almost all economists that increasing public sector investment is sensible. That consensus has been bolstered by the like of the IMF (International Monetary Fund) and OECD (Organization for Economic Co-operation and Development)," he added.

Fiscal spending on big ticket items is being heralded as a necessary compliment to the easy monetary policy being deployed by Governor Mark Carney and his team at the Bank of England (BOE).

The BOE recently dropped the main interest rate to 0.25 percent, expanded its quantitative easing program, unveiled additional funds for banks and kicked off corporate bond buying. Now as the fall statement from the country's finance minister approaches, pressure is rising for the government to widen fiscal investment.


Spending has fallen

Spending on infrastructure has fallen sharply since the country voted to leave the EU in June, according to new construction figures supplied to the Office for National Statistics (ONS) by consultancy group Barber ABI.

Barber recorded that in the first full month after the Brexit vote, the value of private and public construction contracts for July dropped by 20 percent to £1.5 billion ($1.97 bn).

Portes said the government must take advantage of current conditions. "The financial markets are begging us to borrow and spend, essentially for free," he iterated.

Another urging U.K. Prime Minister Theresa May to get out the check book is Michelle Hubert, head of infrastructure at the Confederation of British Industry, a lobby group for businesses.

In an email to CNBC, Hubert said it was necessary for Britain to show it was open for investment by embarking on big ticket construction and engineering projects.

"With interest rates at record lows, expansionary fiscal policy should be used to shore up business and consumer confidence in the short-term. But once the economy has adjusted the government should set out plans to return the public finances to balance over the economic cycle," she said

What to spend big on?

Hinkley Point nuclear power station
myLoupe/Universal Images Group via Getty Images
Hinkley Point nuclear power station

Britain has borrowed £23.7 billion since the start of the financial year in April, which is the smallest deficit since the financial crisis.

However, in July U.K. PM May pledged to boost infrastructure spending and also promised to launch a new Treasury-backed "infrastructure bond".

And last week the British leader went a step further, by committing to a new road tunnel linking Manchester and Sheffield in the north of England.

But other big projects have been thrown in to doubt such as a new nuclear reactor at Hinkley Point, which has been put on hold with big questions raised over its feasibility, security and value.

Additionally, a need to increase airport capacity in the south east of England has been a political hot potato for decades with subsequent governments reluctant to commit to a firm decision.

Hubert told CNBC that delay is costing Britain.

"Last year the CBI showed that delays to getting a decision on airport expansion by 2030 could see the U.K. lose out on over £30 billion in lost trade with the BRIC (Brazil, Russia, India, China) economies alone," she said.


Less glamorous projects

Hubert also wants the government to press on with HS2, a rail project that would offer a new faster connection from the south of England to the country's north.

That project is also controversial, mainly due to expense. In 2011, the U.K. government said it will cost £42.6 billion to build, plus £7.5 billion for the trains.

On Hinkley Point, Hubert said the U.K. is facing an energy supply issue and should press on with the project. The NIESR's Jonathan Portes disagrees.

"There appears to be no economic case for Hinkley Point and the government's decision to 'pause' and hopefully cancel it is welcome.," he told CNBC.

Portes is more supportive of less "glamorous" projects that support local regions directly.

"Housing, especially social housing (is required). Transport, especially improved transport links in the north. School construction is another area of need … In addition, the NHS (National Health Service) is grossly underfunded, and this is beginning to do serious damage: It requires both an emergency infusion of funds and a longer term plan for significant increases in spending".