The Key Ideas

Why (and how) we borrow to Invest

The politics of austerity has tried to confuse us all about debt, deficit, borrowing and investment. It has deliberately mixed up the difference between revenue and capital. Revenue is what you have to spend over and over again like paying wages, buying goods and services, maintaining infrastructure and paying finance costs. Capital is what you have to spend only once like building roads and bridges or new energy generation. Austerity politics has used comparisons with how we run a household to argue against investment, claiming you can't keep running up a credit card bill forever. Which is silly – you wouldn't buy a house on a credit card and you wouldn't buy your groceries with a mortgage. Austerity refuses to accept that there are different kinds of spending as a way to trick people into believing we can't spend.

Another trick of austerity politics is to confuse debt and deficit. Debt is to borrow money – like taking out a mortgage to buy a house. Deficit is when your expenditure is higher than your income – like if you couldn't afford to pay your mortgage payments any more. Deficit is bad – you should always try and stay within your budgets. Borrowing money to cover your deficit is very bad – you can't keep spending more than you have and covering it up with borrowing that gets higher and higher. Deficit-fuelled debt is borrowing to keep taxes low on the rich and to allow big corporations to keep dodging their tax responsibilities. A Common Weal Scotland should raise the taxes it needs to pay its bills and should not get caught in a cycle of deficit and borrowing.

But because deficit-fuelled debt is bad does not mean all debt is bad. A mortgage is debt, and yet it has improved many people's lives and made many people wealthier. Every big company in the world borrows money because it is the most effective way to invest. When you borrow to invest (and you do it right) the whole point is that you invest to create more wealth than the cost of the borrowing. In developed economies, borrowing is one of the main ways to create wealth. What is true in the private sector is also true in the public sector.

We can see this very clearly if we look at history. The periods where Britain had its best economic performance (the industrial revolution, the height of Britain's trading empire, the post-war boom) are the periods of by far the highest public borrowing. During these periods public borrowing was up to ten times higher than our public borrowing is now. Actually, we're living through one of the periods with the lowest public sector debt in Britain's history. But because in the past borrowing was used not to pay for the costs of failing to raise enough money to pay the bills but rather to invest to create wealth, these are also – by far – the periods when Britain was paying its debt off quickest.

Me-First politics hates public investment because public investment makes everyone better off. It favours a low-investment society where big commercial interests make wealth not from investment but from exploitation. It is get-rich-quick politics, the idea that doing nothing is a magic short-cut to creating wealth. It claims if we cut public investment somehow this will stimulate private growth. It sounds too good to be true – because it isn't true.

So how does a Common Weal Scotland invest? There are four ways we suggest this should be done.

Firstly we need to ensure healthy revenue spending which invests properly in public services but does not cause deficit-fuelled borrowing. How this can be done has been explored above. The first stage must be to ensure sound public finance to end the cycle of deficit budgets.

Then we need to identify three kinds of public investment. The first is investment for induced growth. Induced growth is where you invest in a way that does not create direct financial returns but will cause growth which will increase tax take and so pay for itself. A good example of investing to create induced growth is childcare; free childcare doesn't generate profit but by creating lots of jobs as child-carers (especially because these would be comparatively well paid jobs) and by enabling more women to participate in the economy the investment will increase economic growth enough to cover the cost of the policy. Other labour market interventions (investment in workers and the workforce to increase growth) can achieve the same thing.

To invest in induced growth government should borrow. The costs of that borrowing should be met from revenue expenditure, eventually all being repaid by the growth induced in the wider economy. However, claiming willy-nilly that expenditure was creating growth that it didn't actually create is one of the reasons the UK has failed to managed its budgets. Induced growth investment must be carefully monitored to show that it creates the growth it aims to create. If growth falls short, the funding gap must be considered a subsidy and that subsidy must be added to revenue expenditure. This is simply a matter of good discipline.

The second kind of public investment is income-generating investment. There are all kinds of public expenditure that create direct income. For example, when you build public rented housing it generates rents. When you build electricity generation it is paid for by consumers. Investing to create new revenue streams which pay for the borrowing needed (and more) is essential to a national investment strategy.

To ensure discipline it would be possible to create self-contained national companies to borrow, invest in and manage these projects. A national housing company could borrow over 30 or 50 years, build high-quality housing and pay off the borrowing from rents. A national energy generation company (and lots of local companies) can borrow over 20 years against the value of the electricity generated. This creates immediate and on-going jobs, growth and income which will be worth much more over time than the investment made. At any point government can also choose to subsidise this kind of investment – for example if it wanted to lower rents or the price of electricity. That would come from revenue expenditure.

Finally, there are 'special projects' which Scotland might wish to invest in collectively which do not fall under the normal responsibilities of government. An example of this might be where collectively we decide we want to try and stimulate a large-scale industry sector which the private sector is not growing fast enough. If Scotland decided that hydrogen-powered ships or a large-scale biomass industry or a containerised shipping business offer a real opportunity for Scotland's future we can create what are called 'Special Purpose Vehicles' to invest in these. An SPV is a kind of accounting structure which enables public money to be invested but the risk to be contained so that if anything goes wrong it is not the public purse that picks up the pieces.

An example of this might be a national mutual or local mutual company. This could be a company set up with investment from the public sector but would then be run like any other business, borrowing to invest on the basis of future profit. Every Scottish citizen (or community member in a local mutual company) could be given one non-tradeable share in that national company and would have a democratic right to vote on how it is run – and would get dividends from the profits of that company. It would be a limited company and not owned by the government so neither citizens nor the government would be liable.