The Treasury is teetering on the edge as shortages in the housing market increase and a proposed rise in council tax looms as local authorities struggle to stay afloat.
The era of new-age austerity heralded by former Chancellor George Osborne following the financial crisis failed to restore the fiscal budget to prime health, and the economic impact of Brexit on tax revenues is set to further delay growth and halt the Conservatives goal of a balanced budget. Thus, the headache of how to improve public services without shaking the “magic money tree.”
Jeremy Corbyn believes he has found the answer – a National Investment Bank which will invest £500bn over the next decade enabling the British public service to expand as it hovers on the edge of collapse.
National Investment Banks have been tried and tested across the world. British universities and utilities have received billions from the EU’s own Investment Bank based in Luxembourg. As an ‘off balance sheet’ public institution, borrowing by the Bank does not contribute to the public debt and so avoids the tricky political dilemma of explaining excessive spending, as Labour have so often been accused, whilst still being able to implement the liberal ideal of growing the involvement of the state in economic and social spheres. Corbyn’s pricey agenda, as laid out in the 2016 manifesto includes: a £250m Children’s Health Fund, Crossrail 2 and universal superfast broadband by 2022. All these projects will need access to cheap finance without significantly increasing the deficit, and so the National Investment Bank seems the perfect method to achieve this.
However, a bank is still a bank. Unlike the Treasury, a social institution that can invest for the public good whilst raising tax revenue from elsewhere, the National Investment Bank must make a return on capital. As such, the tentacles of Corbyn’s economic plans are limited to projects with a future revenue stream that can pay back the loan with interest – and so whilst social corporations and banks will be able recipients – a new NHS hospital will not be within the remit of this off-balance-sheet institution. However the ability to lend to Small and medium-sized enterprises (SMEs), particularly in the underdeveloped Northern regions, will lower risk of high interest loans from riskier corporations . This will allow small businesses, the engine of competition and innovation that can drive Britain forward into the new digital economy, to prosper and contribute to both technological advancement and economic growth.
Labour’s proposes 12 Regional Investment Banks, that ensure local problems are solved without concentrating all employment and expertise in the City. Whilst the administrative and capital-raising tasks will be left to the National Bank, the Regional arms will be vital for effective implementation – since they are able to conduct in-depth research of local investment issues. Moreover on a national scale, the Banks can target the type of institutions that will shape Labour’s economic vision in the long run. Corbyn’s proposal for funding platform cooperatives democratically-governed technological firms that are run by the workers and users who need them most – unlike the nature of Silicon Valley giants – is a prime example of how the Bank can be the pivot in the transition towards a social capitalistic model and away from the current system that places the profit-maximising corporation at the heart of economic priority.
Yet the question is also one of timing. Despite the flamboyant brilliance of showering cash over budding entrepreneurs and innovative corporations, supply may exceed demand. The uncertainty surrounding the Brexit negotiations creates difficulty for rational firms to form expectations of future profits, and so they will have a preference for delaying investment until future demand is more predictable. There may therefore not be sufficient demand for the money that will be washing around the economy; the Financial Crisis showed that even excessive monetary stimulus by the Bank of England could not break the stranglehold that uncertainty had on investment; thus far from credit drying up, the demand for it may be invisible.
A National Investment Bank will likely be a positive institution with marginal impact. As Brexit uncertainty heightens and the global era of cheap money slowly fades away, excessive Bank borrowing will not only crowd out private investment, but there may also be a shortage of demand. The benefits of regional Banks for targeting local issues and the ability to use the Bank as the pivot in the transition away from corporate capitalism are ambitious visions, yet the impact of a public institutions that provides credit at only slightly lower interest rates than private banks is unlikely to reshape the economic landscape into the social capitalistic digital economy that Labour envisages.
Whilst the current circumstances prevail, Labour’s plan seems set to be just another cog in the economic wheel, providing only a small stimulus to SME growth. Yet as time progresses, the need for government to repel the forces of globalised private corporations and monopolists may demand a National Investment Bank, although whether Mr Corbyn will still be around to see it is another question in itself.