Opinion: showing how borrowed money will be spent on projects with a positive long run impact could make post-pandemic government spending more palatable

By Eoin McLaughlin and Fergal O'Connor UCC

Helping businesses and individuals survive the Covid-19 pandemic has already required significant borrowing commitments by governments around the world, with March recording the highest monthly increases in borrowing by governments at $2.1 trillion. But exiting from the pandemic shock will require even more borrowing by governments to boost globally weak demand and prevent a worse recession than what was experienced in 2008.

In many countries, this level of borrowing will be politically difficult to achieve and the calls for austerity post-lock down have already begun, notably from one from the architects of the UK’s post-2008 austerity, George Osbourne. These calls sound sensible: we must balance the books! But we know now that austerity hindered growth after the global financial crisis and government spending is needed to pull us out of this simultaneous shock to supply and demand.

One way to make high government spending more palatable might be to show exactly where the borrowed money will be spent and picking projects that have a clear positive and long run economic impact. Highlighting that governments are "investing" in specific projects that will be beneficial to society in general for the long term should nullify the simple answer that "too" much borrowing is bad, which is obviously true but how much is too much?

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From RTÉ Radio 1's Drivetime, Minister for Finance Paschal Donohoe discusses the EU's Covid-19 recovery fund

We’ve done it before

Over a hundred years ago, the British state issued specifically designed government-guaranteed financial instruments - land bonds which were derogatively known as "bog stock" - to Irish tenant farmers. These bonds were targeted at a specified policy goal to enable tenant farmers to purchase land from landlords.

Approximately £127 million (approx. £13.4 billion in today’s money) was loaned to tenant farmers for between 49 to 71 years. Over a 40 year period, governments of the day transferred almost all Irish land from landlords to tenants. Political scientists have defined this as state banking, "the allocation of credit by the central government" through the issue of state-guaranteed bonds.  

At the time, the UK Treasury was very reluctant to sanction the issue of land bonds as the terms "would never be dreamt" and they did not want to "scare" the City of London. But in the end, the Treasury agreed to underwrite the bonds because "if there is a really reasonable hope of peace, it will be worth some payment".

Plenty of opportunities

As a recent IMF Fiscal Monitor report shows, public investment has been steadily declining over the past 30 years in advanced economies and growing slowly in lower income countries. But you don’t have to look hard for examples in any country for big projects that need funding. In the UK and Ireland, the political parties debate ways to fund much needed new social housing, with 10,500 people in emergency accommodation in Ireland. With the cost of a new home coming in at €234k, this represents a significant investment from the government of a small country.

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From RTÉ Radio 1's Morning Ireland, Minister for Finance Paschal Donohoe on the financial fallout of Covid-19

Across the Atlantic, the American Society of Civil Engineers says in the 10 years to 2025 there is a $2 trillion infrastructure gap and that failing to make that investment will cost the US economy $3.9 trillion dollars. Renewable energy infrastructure across the world will require a $27 trillion investment by 2050 in order to reach the objectives of the Paris Agreement.

The scale of these funding gaps is no reason to avoid them as economies has spent on this scale before. During the Second World War, the US government was managed to run deficits of between 27% and 21%  for 3 years running – where there’s a will there’s a way.

Large scale funding of public infrastructure is what was done to eventually contract the Great Depression in the 1930s, costing $653 billion in the US alone in 2009 terms. This was slightly below what was spent by American Recovery and Reinvestment Act of 2009 at $840 billion. While this had a positive effect, it has been judged to have been too little to bring the economy back to its previous potential.

Making willing participants

Finding a way to make these massive, vital investments should be a focus of governments post-pandemic. Spain has already suggested that EU countries issue perpetual bonds, a type of interest-only loan to governments that would allow long run investments. In fact, these were the mainstay of UK government debt from the Napoleonic wars through to the First World War. But these will come up against opposition from those worried about deficits in the same way the at any other government spending would. Perhaps more so as the debate will be framed around never repaying the debt!

Having government bonds for specific projects would allow those with a particular interest in fixing an issue a way to invest that also helps to solve the problem.

Reframing this debate from "borrowing" to "investing" in specific necessary projects, all which will provide positive returns to the economy in the long run, would help counter pressure not to boost demand through spending, something which will hurt the world economy’s attempt to overcome a Covid-19 induced depression. Issuing bonds where the money must be spent in specific areas would make explaining why the money was borrowed to voters easier and show that even through a lot has been borrowed, there is plenty more to "invest" in yet.

There are already examples of targeted bond issues such as Green Bonds in Ireland and evidence that the demand is outstripping supply from investors. Having targeted government bonds for specific projects, such as social housing or climate change, would allow those with a particular interest in fixing this issue a way to invest that also helps to solve the problem.

Dr Eoin McLaughlin is a Senior Lecturer in Economics at the Cork University Business School in UCC. He is a former Irish Research Council awardee. Dr Fergal O'Connor lectures in finance at the Cork University Business School in UCC

The views expressed here are those of the author and do not represent or reflect the views of RTÉ