'Munibonds' and the national debt
Local authorities are on the verge of issuing bonds in order to raise revenues and make up for further cuts to their government grant.... The "munibonds" will be issued by a new municipal debt agency, and are backed by 48 local councils and the LGA. Scotland will also acquired the powers to issue its own debt in what have been dubbed "kilt-edged bonds".
Why is it such bad news? Shouldn't government be allowed to borrow, for investment, like the rest of us? Few of us could buy a house from our savings: instead we take out a loan. So why should a local authority – or even a country – not borrow to fund its schools, roads and care homes?
I used to read eighteenth-century authors and economists like William Cobbett (of Rural Rides) and Adam Smith (of The Wealth of Nations) and chuckle to myself as they went on and on against the idea of the national debt. Much of the huge rise in prosperity of our times, I supposed, had been built on debt, much of it government debt taken out to fund market-enhancing improvements in roads, bridges, airports, schools, hospitals and housing.
Now I think the Cobbetts and Smiths were right and I was wrong. If we could rely on governments to make rational, objective decisions about the overall benefits and costs of infrastructure finance, then there might be a case for allowing them to borrow for public investment. But we cannot rely on governments to be so dispassionate and high-minded. The very power to borrow is itself too much of a temptation pulling them in the opposite direction. Consider, for example:
(1) It is impossible enough to measure the 'public' benefit of government spending, when there is no such thing as the 'public interest' – only a clash of opposing interests. (Think airports, and the convenience for travellers of extra flights and the distress of local residents over traffic and noise.)
(2) The problem is compounded when it is confused by electoral interests. (As Khruschev noted, "politicians will build a bridge, even where there is no river." All the more so, if there is an election coming up.)
(3) With electoral advantage in mind, it is too easy for those who control the public finances to segue from investment to spending. As Chancellor, Gordon Brown, to his credit, said he would confine borrowing to investment projects. But by his reckoning, anything spent on schools or hospitals was 'investment' for the future – even though much of it was patently simply consumption for today.
Such factors help explain why governments have growth so much, and spend money on so many marginal activities. It is too inviting to spend now, earn the applause of the public, and let the next generation, who do not yet have a vote, foot the bill for it all. Public Choice economists call it 'time shifting'. And in that, of course, the public themselves are complicit. With interest groups, from pensioners to patients, demanding more spending on themselves, and politicians happy to borrow, at little cost to themselves, to provide it, how can we ever expect prudence in the public finances.
It is a draconian answer to say that we should stop government borrowing at all. But actually, the eighteenth century thinkers were right.