Funding great public projects

The long lines of Venezuelan immigrants standing in the sweltering sun have ignited many emotions; and fears with deep roots. But protecting our wealth is a big part of these fears.

Many of the greatest passions and bitterest acrimony of national life have been those expressed over its treasure. Death and taxes are after all life’s two certainties. And death at least comes knocking only once, unlike taxes.

Amidst the many debates, people are increasingly asking: what is worth spending on? The sight of many suffering people, some starving, has shown that this question is anything but cold.

Yet the debate so far has ground to a halt. Between two truths that are reasonable and self-evident on their own; but taken together can stymie action.

One side argues that there are worthy projects that relieve suffering and improve social welfare. Often a moral case is made for economic redistribution from the rich to the poor, even at the cost of growth. The other side argues that the money has simply run out, and that what little we have ought to be spent to boost the economy.

Is there a way out of this?

Yes. But it requires that all projects meet one test. They must generate an economic rate of return that exceeds the cost of government borrowing.

Now it is widely acknowledged that the old ways of measuring economic return in a country (through the mighty Gross Domestic Product) are deeply flawed. So any rate of return we consider must be adjusted to consider a project’s impact on our environment.

But for simplicity’s sake, if the government can borrow or issue bonds at a rate of three per cent, then those funds should be spent on a project whose economic benefits exceed that.

Now hang on, it is not just interest. We still have to repay the debt, don’t we? Well, it turns out that we don’t.

By the time that debt comes due, the next generation can borrow more to repay the original debt. In theory, it should be possible to kick the can down the road indefinitely.

Of course, we can’t borrow an infinite sum indefinitely. For one thing, more borrowing means more interest payments. And we must find lenders and people willing to re-finance the original loans or bonds.

As a government borrows more, the chances fall that they’d be able to re-pay the loans in a crunch by raising revenue. The government becomes riskier; and lenders become less willing to re-finance the debt, and demand more interest to compensate for greater uncertainty.

But let’s go back to that basic rule. If we insist that a project generate a certain amount of economic return, and demonstrate it, then bondholders and lenders will be given the comfort that their money can be refinanced or repaid.

Many would call instead for less regulation and lower taxes. That is right and necessary. But at our stage in development we do still need some targeted, catalytic spending to kick-start growth.

Those making a case based purely on social justice might argue against an approach that targets growth. What about moral justice, after all? Well, if examined closely, it turns out that many of the projects that would serve the greatest social justice are in fact those that would boost economic growth the most.

Great infrastructure projects that reform our mighty utilities and give hundreds of thousands water and electricity for the first time. Targeted investments in better prisons, crime prevention projects, and a more efficient judiciary. Agricultural training, culverts and water management. Mental health, and literacy. Integrating immigrants.

Many have made the moral case, only to run up against arguments that the money can’t be found. It is time to make a different case. That smartly made investments will contribute to economic growth, and it is worth borrowing to fund them.

Doing so can break the narrative that reform must be a bitter pill. Many will lose their jobs in restructuring our state enterprises. But if new investment comes alongside it, then better, productive jobs will come to replace the old.

Growth in the long term will make decisions about redistribution and equity easier. If people feel their lives are improving, they will be more willing to give back to the vulnerable.

The principle of compound interest means that decisions taken now will mean much more to future generations than they do to us. We owe it to them to show that reform can be compassionate, and hard-headed at the same time.

Kiran Mathur Mohammed is a social entrepreneur, economist and businessman. He is a former banker, and a graduate of the University of Edinburgh