Spend less, invest more. As slogans go, Mark Carney could do worse. Despite some online ridicule, it’s a perfectly sensible idea.
Too much of the federal government’s outlays are for current expenses, a mix of government operations and transfer payments: spending, in other words. Not enough is for the sorts of things that increase the stock of capital in the economy, in ways that increase its long-run productive potential: investment.
So far, so good. Where Mr. Carney’s big idea begins to go astray is in his proposed corollary: splitting the federal budget into separate operating and capital accounts. The operating budget would be balanced (in three years!), but not the capital budget.
There’s a germ of truth in this idea, too. It’s clear why you’d want to avoid going into debt to fund current expenses – “borrowing to pay for the groceries.” You saddle yourself with the costs of interest on the debt, now and in future, for no future return.
Investments, on the other hand, pay dividends well into the future. So in principle it makes sense to spread out the burden of paying for them as well, enlisting both current and future taxpayers. Which is what debt finance amounts to.
There are a few problems with the idea in practice, however. One, governments typically amortize capital investments over the life of the asset, meaning their cost is shared between several years’ budgets, rather than taking the whole hit in year one. So future taxpayers are already paying for them, in part.
Two, just because you call something an “investment” doesn’t mean it is. Governments are forever trying to pass off spending as investment – proof, perhaps, that the distinction is a valid one in principle. Unfortunately, it’s also proof of how hard it is to enforce in practice.
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Mr. Carney has an answer to that: he’d get the Parliamentary Budget Office to sign off on his budgets, certifying that his investments are really investments. But then you run into objection three: just because a thing is an investment doesn’t always mean it’s a worthwhile investment. Its returns, to society if not to the government, have to exceed its costs.
And by costs, I don’t mean just the interest cost, but the opportunity cost: what the same funds might have earned if they’d been invested another way – for example, by leaving the money in private hands, to be invested in private projects.
Which brings us to objection four. It’s obviously a problem when private investment is “crowded out” – displaced – by public spending. But it’s not obviously any better when the crowding out is for public investment. It depends on the returns to each.
And so to objection five: how do we know what the return on a public investment is? One way is to see what people are willing to pay to use it. That’s the thinking behind charging fees for services such as roads or water, rather than paying for them out of general revenues.
This, too, makes sense. Scarce tax dollars should be reserved for the things that can only be paid for with taxes. So: borrow to invest in the upfront costs of providing these services, and pay it back out of the fees you charge to consumers.
That’s fine. But if you can pay for them that way, why should the government be the one to do the borrowing? Why not let private investors assess – and assume – the risk, in return for the expected future revenues? Scarce government credit, like taxes, should be used for things that can only be financed by government: pure public goods like, say, defence procurement. We’re going to need a lot of that in the next little while.
Finally – objection six – even if every dollar borrowed on the public dime were legitimate public investment, you still have to be able to finance it. Contrary to myth, governments cannot borrow unlimited amounts, in perpetuity. To be sure, they can borrow a lot more, for longer, than private borrowers.
But at some point the costs of interest start to eat up so much of revenues that the people who lend to governments get nervous – if not that governments will outright renege on their debts, then that they will try to weasel out of them, through inflation. So they mark up the rate of interest they charge and make the situation worse.
Just balancing the operating budget, then, while financing the capital budget 100 per cent with debt, doesn’t seem terribly prudent. At the height of an expansion, you’d want to be running surpluses on the operating account, to offset at least some of the deficit on the capital account.
Or better yet, maybe just stick with one consolidated budget statement.