Public investment is now prioritised according to whether it can be disguised by the private finance initiative: Goodhart’s Law has come into play once again.
Everyone is impatient about the slow progress of the government’s private finance initiative. There are contractors, who are anxious to get the work building roads and hospitals. There are the users, who cannot wait to use the roads and fill the hospitals. And also pressing are the lawyers, who want to get on and write the complicated contracts, and the merchant bankers who want their fees for the transactions.
Only the Treasury is holding everyone back, with its tiresome insistence on defining and enforcing the very complicated rules of a game which everyone else would like to start playing. But if there is anything to criticise the Treasury for, it is for not being intransigent enough. The private finance initiative is a hopeless muddle created by the Treasury’s attempt to evade its own, mostly sensible, rulebook.
There are three different issues conflated in the PFI. The whole process began because the government has since the early 1980’s been concerned to limit the level of public sector borrowing. There are good reasons for this concern. Other things being equal, the greater is the fiscal deficit, the higher is the level of demand in the economy, the looser is monetary policy, and the stronger are inflationary pressures in the economy.
But at this point Goodhart’s law comes into play. Goodhart’s law – named after a former chief economist of the Bank of England – says that whatever you adopt as a target ceases to be a relevant target once you have adopted it. And as soon as public sector borrowing became a focus of policy, more and more attention was devoted, not to controlling spending, but to continuing to spend while finding reasons why what was spent did not form part of public sector borrowing. It is a process now breaking out all over Europe as governments struggle to meet the Maastricht criteria.
Now it is a good thing that water companies should borrow to replace their pipes and renew their sewers. But if we are trying to control inflation, it makes no difference at all to the inflationary impact whether this borrowing is undertaken by the Thames Water Authority and repaid from our water rates, or whether it is undertaken by Thames Water plc and repaid from our water rates. In either case, the money comes from the same people and is funded by the same people: the same people supply the pipes and dig the trenches. The impact on demand, on wages, on capital markets is not changed by changing the way in which you describe the process of all the transactions are identical.
Now that doesn’t mean there may not be benefits to privatising many of these activities. A second aspect of the private finance initiative involves the introduction of private sector disciplines to capital expenditure in the public sector. And mostly this is something to welcome. It will increase the efficiency and effectiveness with which the money is spent. But what is spent is still spent.
And that is the third, and most problematic, feature of the private finance initiative. The underlying problem is simply that there is too long a queue of worthy public sector projects in need of cash. We would all like new hospitals and new tube trains, and there is not enough money to go around. But the private finance initiative is an absurd way of deciding how the inadequate money that there is to go round should be spent. Projects which can be disguised in the clothes of PFI are allowed to jump the queue. We build the Jubilee line extension to Canary Wharf, not because it is better for passengers than many other improvements to the London Underground network, but because it has a small element of private finance.
And that is what is wrong with the concept of private finance initiative. It substitutes an irrational and opaque system of deciding public expenditure priorities for one which, despite its many problems, is at least rational and transparent. It is still true that the only ways government can find money is by taxation or the printing press. Whatever creative finance techniques we use, the number of people who can be put to work and the capacity of the contracting industry to meet demand remains the same: and whatever vehicle is used to borrow the money, you still have to pay it back. If we can afford to employ more people, to utilise the contracting industry more fully, and to repay those who lend the money to make these things possible, we should do so anyway. We should not allow our public spending priorities to be determined by the accident of whether particular items can be filled within whatever set of PFI rules we may devise.
And yet I have a nagging doubt. Go down a list of PFI projects and you will agree that most of what is on it are things we really ought to do. The success of the National Lottery demonstrates how much joy can be created by having a modest amount of public money to spend outside the confines of dreary worthiness and political opportunism that are the Treasury’s priorities. The PFI, also, gives the projects the Treasury would be minded to reject a second chance. We all know from our personal lives how spending money we didn’t really think we had can give pleasure quite disproportionate to the sum involved. Perhaps a better solution than the PFI would be to allocate £5bn a year to be spent on public projects that the Treasury has turned down. After all, competition improves performance, even – perhaps most of all – in the spending of public money.