If the next government isn’t diverting resources to investment then it will be giving up on our future

To prove you are not
a robot, click on the cars in this picture.

You might be
surprised that this blog has featured the causes and consequences of
flooding over half a dozen times. However this is the first time I
have been able to illustrate one of these posts with a picture taken
five minutes walk from my home. In case you are wondering, there are
unfortunately three cars in this picture, almost completely
submerged by flood water.

Flooding and the
damage it causes illustrate three themes that run through this blog.
The first is the harm caused by governments trying to hit arbitrary
and unnecessary financial targets by cutting back on public
investment. The 2010 Coalition government cut
back spending on flood defences sharply, and we see
the consequences of that almost every year when we get high levels of
rainfall. The second is that most of the media invariably fails
to hold politicians to account for these failures,
either by choice or because the broadcast media prioritises getting
reporters in front of flood waters over briefing them properly.

The third theme is
the ability to ignore or forget expertise. In 2007 the Pitt
review concluded that climate change would create more
and more of the kind of events we saw last week (essentially
because a warmer temperature means that clouds can hold
more water), and while the Labour government acted on Pitt’s recommendations by increasing flood prevention spending
substantially, the review was ignored by subsequent governments and
largely forgotten by the media. As we saw with austerity, Brexit and
Covid, it is very easy for governments to do things that a majority
(or even almost all) experts think is foolish, and yet much of the
broadcast media thinks its job is to present Westminster gossip or
political debates rather than inform its viewers about the knowledge
we have. The BBC’s cut in funding for Newsnight is just the latest
example of how it is ignoring its mission.

In this post I want
to use flooding as an example of a fourth theme that I am bound to
return to time and again over the next few years, and that is the
scale of extra public investment, and incentives for private
investment, that are now required. My last
post talked about greening the economy to get cheaper
and more sustainable energy. Flooding, and how to mitigate its
effects, is an example of adaptation to the climate change we have
already created and are bound to create in the future however quickly
we green the economy.

Unfortunately
climate change is just one of a growing list of problems that require
more investment. The Covid pandemic demonstrated the need for
additional capacity within the existing health system to rapidly
scale up its ability to test and trace new viruses. Those countries,
like South Korea, that had already invested in this capacity did far
better at saving lives than most other countries. Yet, as John
Burn-Murdoch showed here, the NHS has been
deliberately starved of investment since 2010, as has spending on
preventative care. As a result, we need massive investment in health
just to catch up to where we should be, let alone help us deal with
any future pandemic. [1] In addition, we need to make our
public buildings (especially schools) more resistant to airborne
disease transmission.

More than ever, we
need the popular narrative on what governments should do to move from
obsessing
about government debt to obsessing about public
investment. We owe it to future generations to mitigate the impact of
climate change, prevent worsening climate change and deal better with
future pandemics. Not doing so would saddle these generations with a
burden far greater than paying a bit more interest on government
debt.

However it is
equally foolish to pretend that investment on this scale is costless
in economic and political terms. With the major economies, like the
UK, working at or near to a non-inflationary maximum, additional public and private
investment requires a significant shift of resources from private
consumption. As Martin
Sandbu noted here, democracies are not well set up for
such shifts outside periods of war. Instead politicians prefer
incremental changes, where losers can be compensated if necessary.
But as he also writes, “what choice do we have” if we want to
avoid leaving far greater problems for future generations.

While higher public
spending on day to day activities in such situations requires
higher taxes, higher levels of investment paid for by
borrowing will require interest rates to be higher than they
otherwise would have been to free up resources for that investment. [2] We can already see the battle lines of the
next election reflecting this, with the Conservatives saying that
Labour’s “reckless” (meaning very necessary and beneficial)
additional green investment will push up mortgage rates. This line to take may not gain much immediate traction because people remember the
results of Liz Truss’s little adventure as PM, but it will remain
an attack against any government that dares to invest.

If a future
government does prioritise public investment over reducing its debt
and keeping interest rates low, the biggest threat it will face is
from simplistic (“populist”) political attacks which suggest that
you can cut taxes while maintaining public services, invest without
borrowing and attract the labour industry needs without immigration.
It is therefore imperative that all parts of society begin to see the
benefits from additional investment, particularly those areas that have
been neglected in the past. This, in turn brings us an additional
reason why public investment in the UK has to be much higher, and
that is improving
transport infrastructure outside London.

The United States
under Biden not only shows what can be done, but the political
fragility of any attempt to invest in the future. The Inflation
Reduction Act has
been stunningly successful at using public money to
mobilise private investment to green the economy. Partly as a result,
the US economy is much stronger than most other major economies, and inflation is coming down with the soft
landing theory
predicted was possible but which many economists
thought improbable. Yet Biden is getting
little credit for all this. Instead political
commentators obsess about his age, and polls suggest a close race
with would-be dictator Trump.

Flooding in the UK
is inevitable, but the scale of damage it inflicts is not. Climate
change is inevitable, but its extent and destruction it creates is
not. At some point another pandemic is bound to happen, but how much
illness and death it causes is a choice society makes. To have any
hope of making the right choices requires cooperation within and
between societies with governments taking the lead in investing today. It requires a
relatively small current sacrifice for a far greater future gain. The
ability to do that is part of our humanity, but unfortunately so is
tribal division, falling for charisma and believing we can return to a romanticised past.

[1] We also, of
course, need to spend more day to day on health, including paying NHS
staff much better, but while investment spending should come from
borrowing current spending should be paid for by raising taxes. For
this reason I don’t think taxes on working people in the UK should
be lower.

[2] There are two reasons why interest rates will raise. The first, and most likely, is that higher demand for labour (because investment increases) will lead the central bank to raise short term interest rates to head off inflationary pressure. This in itself will raise long term interest rates, including interest rates on government debt, by at most the increase in short term rates. The second, and less likely, is that long term interest rates on government borrowing will rise just because the government is borrowing more.