Disappointed that high taxes, regulations and inflation have discouraged private investment, and that low yields on government debt have discouraged private investment in government programs, the UK Government plans to bribe pension funds to invest Â£50bn in infrastructure.
Ministers have drawn up plans to invest Â£500m to make currently unavailable projects attractive to the private sector. They claim that this will cause pension and insurance funds to invest Â£50bn in their proposed infrastructure projects, creating growth and jobs. However, this forgets that any investment in the government’s preferred schemes will be at the expense of currently viable projects presently benefiting from private investment. The net result will therefore be less finance available to the rest of the economy, and less jobs and economic growth overall. Nothing else can happen if government maintain high taxes to make unviable projects viable at the expense of currently viable projects.
This Keynesian project also turns its back on the principle of allowing market forces to choose the most productive ways to invest capital. For example, government seeks to invest in new power plants. But what if the market would prefer more efficient appliances or research and development in new sources of energy? The government also seek to build new roads, but it is possible that the public, given back more of their taxes, would choose to invest in local production and retail that would reduce their need to travel. Unfortunately we just won’t know what the market would have chosen if this project goes ahead.
If the government’s investment in these projects fails to attract private investment, will they use force to divert funds into government bonds? That may sound unlikely, but bear in mind that all high street banks are forced to invest a percentage of their deposits in government bonds and government has already forced banks to invest a percentage of their bailouts into government bonds. This is why the bailouts did not result in more lending to the private sector. Consider that this manipulation of private deposit could have contributed to the economic crisis in the first place, because those funds would otherwise have been invested in commodities, mining, factories, farming, housing and viable private sector infrastructure projects.
More to the point, if this scheme fails, how will government explain that they once again missed a golden opportunity to boost the economy with tax cuts and reforms to cut red tape? They could begin by abolishing the 50% tax rate which discourages the very entrepreneurs that the economy needs if it is to create jobs.