With the Scottish Government announcing its plan to create a £2bn government-owned investment bank, is it time that the UK as a whole follow suit? The Labour Party certainly think so. In Labour’s 2017 General Election Manifesto they pledged to create a £250bn National Investment Bank to restructure the economy and the financial system. This has been argued after the divestment culture seen in the post-financial crisis world. The bank will provide additional resources for small businesses and regional economies, which have been neglected by the private sector for many years.
Funding for the publicly owned investment bank would come from the same channels in which the rest of the government raises its current additional expenditure (i.e selling bonds). However, thanks to some accounting trickery it wouldn’t appear on the government balance sheets. The only potential risk for the government is that it is liable for all the bank’s debt if it were to become insolvent.
The SNP’s Scottish vision is all too similar to Labour’s. It would fill the void created by the private sector’s lack of investment. The bank will help promote investment in capital and support development, especially in areas such as infrastructure and environmental protection, helping employment mobility.
Britain is an economy with pitiful investment and poultry productivity. The private sector and speculative finance industry have only been focused on short-termism, meaning the foundations of the economy have not been concentrated on its long-run health. This has only been intensified in the post-referendum world. Brexit induced uncertainty has led to reduced business confidence and a reluctance on the part of the banking sector to finance business ventures.
Although the UK has seen the strongest two quarters of productivity growth since the recession, Britain’s productivity has remained historically low. According to the Office for National Statistics, output per worker is approximately 16 per cent below its pre-crisis level. The evidence shows that we have a productivity problem that needs to be drastically addressed, and along with a recent rise in the unemployment rate the government appears to be losing its grip on the economy.
Britain will also soon lose access to billions of pounds from the Brussels-based, EU Investment Fund. Many of Britain’s local and regional business decisions rely on access to this cheap credit. The government should seriously consider replacing the fund once we have left the EU.
A national investment bank could be the cure to our chronic investment problem. Investment is interlinked with many other economic fundamentals. The bank could help boost productivity which has been one of the main causes of weak wage growth. It has not kept up with living costs, squeezing many people’s purchasing power and increasing wealth inequality.
However, looking at empirical evidence, national investment banks have had a mixed performance. A publicly owned bank has the potential danger of crowding out the market which is detrimental to private investment. If the private sector is dissuaded from investing, this will lead to a distortion in economic decision making and may lead to an unbalanced economy.
Scotland’s investment bank can be seen as a dummy run for the rest of the UK, although we may be waiting a long time before we see any major results filter through. The scale of Labour’s plans for a national investment bank is 125 times the size of Scotland’s. That is a significant amount of money that the government would be potentially liable for and could have an inconceivable wider impact on the economy. Many economists are concerned about the inflationary impact of any national investment bank, with many calling the idea the “People’s Quantitative Easing”.
Whether you agree with, this concept or not, it should at least be considered as one of the options on the government’s cards to solve Britain’s productivity problem, which needs tackling in order to solve the cost of living crisis.