Rachel Reeves’s plan to get private businesses to invest in the UK if Labour wins a general election – rather than the government itself investing more money – is exactly wrong, according to economists including Simon Wren-Lewis, over at Mainly Macro.

This Site has already discussed why it is wrong for private money to be involved in the big national service-providing investments: we end up renting assets from them at a much higher price than if the government owned them itself, and this pushes taxes up until public services become unaffordable.

In his latest article, Professor Wren-Lewis suggests that politicians are being pushed into saying that public investment is unaffordable by a right-wing mainstream media that has long described it as “toxic”.

He refers to Gordon Brown’s choice to use the Private Finance Initiative (PFI) to get investment done without additional public borrowing, despite the fact that it did not make economic sense at the time (public borrowing is far cheaper). The result is that buildings and equipment currently being used in the national interest will revert to private ownership in the future and will become much more expensive to use (this is a theme of UK politics at the moment, so get used to it).

Prof Wren-Lewis adds further reasons why this perceived toxicity is nonsense: government debt is also an asset for those who hold it; the cost of borrowing depends on expectations of future short-term interest rates, not how much it is borrowing; and we have a central bank (the Bank of England) that will always act as a buyer of last resort for government debt (as it did in the Global Financial Crisis, the Covid Crisis and the Truss debacle).

He dismisses claims that the Truss crisis indicates that Labour should be averse to increasing borrowing, by pointing out that she cut taxes without indicating how she was going to cut public spending – at a time when it was not politically credible to cut spending at all. This meant it became hard to forecast future Bank of England decisions about interest rates – not that the UK was in danger of defaulting on its debts.

And he goes on to say that this is too subtle for the UK’s mainstream media to bother relaying to the public. It’s easier to say that Truss borrowed too much. It also suits a predominantly right-wing media to say this because it promotes the falsehood that it is bad for the public sector to borrow to invest but good for private businesses to do so.

It is hard for an opposition party to fight a mass media narrative – even one that is false; spokespeople are only allowed to speak during small interview moments they are allowed by those media, which can broadcast their own preferred perspective day and night.

But…

Professor Wren-Lewis goes on to say that a newly-installed government is an entirely different animal, with far more power to set the agenda and terms of reference. Sadly, they do this according to whether they believe it is in their own personal best interest to do so.

He says the case for a massive increase in public investment is overwhelming: NHS funding collapsed after 2010, and education funding is about 26 per cent – more than a quarter – less than in 2006-9. Those are just two examples; the entire economy has been deliberately starved by the Tories and has suffered badly as a result.

The public expects a massive increase in public investment to reverse the last 14 years of government neglect – and a Labour government would need to do this early in its tenure, if it wanted to get credit for improved prosperity by the next election in 2028 or 2029 (or 2034). Delaying that in order to get media credibility will not improve future election chances if voters don’t see a massive improvement in public services and economic growth.

Increasing public investment won’t worry the financial markets because it is desperately needed and all the genuine economists know it.

Rachel Reeves needs to be saying she’ll adopt fiscal rules that will never hold back public investment – otherwise she’ll waste that honeymoon-period opportunity to change the way the media report on the economy.

Sadly, she seems determined to do just that. Her Mais Lecture speech indicates an intent to carry on the disastrous economic plans of the current Tory government – but worsening their impact by inviting private business even deeper into government service provision than before.

Make no mistake: a Labour government working in this way will be a catastrophe for the UK – and that means serious trouble for you.

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