First posted Friday, 8 February 2013 at Socialist Economic bulletin

Bribing the private sector to invest isn’t working

By Michael Burke
The government’s flagship scheme for promoting investment in infrastructure has been branded a failure.  A report in The Times [i] quotes speakers for both the Engineering Employers Federation and the Confederation of British Industry as saying that the scheme is ‘disappointing’ and ‘more needs to be done’.In July 2012, the government announced the scheme, saying that it would use its balance sheet to support infrastructure investment as the means to revive the economy.  Bond holders are willing to lend money to the government but less willing to lend to private capitalists.  The government’s scheme was supposed to use this advantage to offer guarantees to the private sector so that they would invest in infrastructure projects.  These are increasingly and correctly regarded as a key mechanism to boost growth and employment and to address the British economy’s creaking infrastructure.However, it is reported that only one project has been agreed, the extension to the Northern Line tube in London, which would have gone ahead without the UK Guarantee.The government’s inability to promote private infrastructure spending occurs as its own investment continues to be cut.  According to the Office for Budget Responsibility, government investment will be cut by nearly 30% in total under current government plans.  These may alter in the next Budget in March.Investment driven by profits

The failure of the government’s policy to deliver any new infrastructure spending is because of an insistence on the failed neoliberal model of the economy.  One of the many central and incorrect tenets of neoliberalism is that all ‘economic agents’ are essentially the same.  Those economic agents are private firms which maximise revenues and private individuals who maximise their own well-being.  From this, it is argued that government stands in the way of this series of rational choices, by taxing and spending incomes that firms and individuals could better choose how to spend themselves.

This is a concocted world which bears little relationship to reality.  Neither firms nor individuals operate in a world of perfect knowledge to inform their expenditure, economies of scale often mean that government can purchase the same goods or services in bulk much cheaper (education, health, transport, banking, etc.) than private firms or individuals can.  For large infrastructure projects, it is often the case that only government can borrow funds sufficiently cheaply for large-scale investment.

But perhaps the biggest fallacy of all in the neoliberal model is the one in the sphere where it claims the greatest authority, which is the factors governing the behaviour of private firms.  Firms don’t seek to maximise revenue at all, as the neoliberals claim.  They seek to maximise capital, which normally means to maximise profits.  And they don’t face a multitude of competitors each seeking to compete by allocating investment more productively than the next.  In the most decisive areas of the economy, banking, cars, aviation, large scale housing, energy production, and so on there are just a handful of firms.  They are oligopolies.  This means that frequently the way to maximise profits is to increase prices, sometimes reducing supply to do so. 

The housing crisis

To take just one example, there is a structural shortage of at least 2 million homes in England and Wales alone, comprised of the numbers of households on waiting lists for housing (1.7 million) and others in grossly substandard accommodation.  Yet there were just over 100,000 new homes built in the latest 12 month period.  This is slightly less than the growth in the number of households, meaning that the housing shortage is increasing.

Yet the Financial Times recently reports that UK housebuilders are enjoying a ‘state-backed boom’ [ii].  The boom is in the share price of the stock market-listed housebuilding firms, up 46% in the last 6 months, based on an unprecedented rise in profits.

These profits arise because the term ‘housebuilder’ is a misnomer.  Housing starts are at record lows but, Barratt (one of the biggest firms) has been buying land at its fastest rate ever.  These firms are in reality land buyers, who have an incentive in hoarding land, which continues to rise in price and in restricting the supply of new housing for the same reason.  According to Noble Francis, economics director and the Construction Products Association, ‘The major housebuilders are not going to double the number of units they build because it’s not in their interest’.

Government subsidies for mortgages simply operate as a price-support mechanism for the housebuilders. This is a ‘state-backed boom’ for capitalists, not for house building.

Dividends versus investment

Just as the large housebuilders have no interest in increasing the number of houses they build as they seek to maximise profits, not revenues, so capitalist firms in general have no incentive to produce without the expectation of profits.
 Not all firms are as fortunate as the housbuilders to be oligopolistic suppliers to a market where there is already a structural shortage.  As a result, the profits of most firms have not risen in the same way.

The chart below shows the gross operating surplus of firms (green line, left-hand scale).  The gross operating surplus is often described as the profit share of national income and is similar to the Marxist category of surplus value.  The chart also shows the level of investment by firms (gross fixed capital formation, blue line right-hand scale) and the level of dividend payments to shareholders (red line, right-hand scale).  Together, these two form the overwhelming bulk of the distribution of the surplus.  The other main category is interest payments, which have fallen sharply as both interest rates and debt levels have fallen.

Chart 1
13 02 08 Chart 1

In effect, firms can either invest profits or distribute to them in the form of dividends to shareholders.  Nominal profits have only just recovered, to £68.2bn in the 3rd quarter of 2012 from £66.6bn in the 1st quarter of 2008.  But investment has fallen to £29.8bn, from £33bn.  At the same time corporate dividends have increased sharply, from £21.5bn to £25bn.

If we compare the respective low-points for the gross operating surplus, investment and dividends the picture is even more stark.  On this measure, the surplus has increased by £11.1bn from its recessionary trough, but investment has increased by just £3.6bn.  The bulk of the surplus has gone to shareholders, with dividends increasing by £7.4bn.

Chart 2
13 02 08 Chart 2

Because the increase in the profit share has been minimal, the willingness of firms to invest has been minimal.  The purpose of capitalism is to maximise capital which requires generating profits.  In the chart above the official measure of the profit rate is shown.  Although this official measure from the Office of National Statistics has some shortcomings, these do not invalidate the overall trend described in the data.  This shows that the profit rate has recovered from its lows, but is very far from a full recovery.  This meagre increase in both the profit share and the profit rate explains the unwillingness of capitalist firms to invest.

However, unwillingness to invest is not the same as inability.  British firms’ refusal to invest and increased payouts to shareholders have also been accompanied by an increase in their net savings as shown in the chart below.  In a vigorous capitalist economy where firms borrow to invest.  It is a measure of the decrepit nature of British capitalism that over the 25 years, borrowing has been unusual, and corporate savings have been the norm.

Chart 3
13 02 08 Chart 3

As a result of this prolonged bout of savings, the cash balances of British non-financial firms have reached record proportions.  At the end of December 2012, there were £777bn in sterling short-term deposits held in UK banks, not including deposits by other banks or public sector bodies. The bulk of these are deposits by firms who are simply hoarding cash.

It is frequently argued that nothing can be done with this cash pile, as it belongs to the private sector.  But we are also told the George Osborne has directed that RBS pay its LIBOR scandal-related fines from bonuses.  This is simply because a further round of bank bonuses would be massively unpopular.

It is therefore absolutely clear that the government’s 83% stake in RBS means that it can direct bank policy if it chooses.  Instead of failed bribes to the private sector to invest, the government could simply direct RBS to lend the funds to the necessary infrastructure projects required to boost growth and jobs.  It could lend to local authorities to build council houses and so on.  Given that every bank operating in Britain can only do so with the support of a government guarantee for deposits, liquidity support from the Bank of England and other measures.  If the government insisted, they would all have to increase lending.

The state can do this because unlike the private sector, it can invest without the requirement to generate profits for shareholders.  The policy of bribing the private sector to invest has already failed.

(emphasis added)

Other posts by Michael Burke reposted on Think Left:




The Autumn Statement and long-term Austerity

Investment Slump Greater Than Whole Loss of British GDP


The new recession is directly made in Downing Street



[i] ‘Scheme is no guarantee of reviving the economy’, The Times (£), February 4,
[ii] ‘Housebuilders enjoy state-backed boom’, Financial Times (£), January 22,

Planning to Blame Immigrants? Get Your Facts Straight & Get Rid of Your Prejudices, Nick Boles


By Jim Grundy

In today’s ‘Daily Telegraph’ Tory Planning Minister Nick Boles, who recently announced the partial deregulation of the Planning system, said the fault for the resulting ‘concreting over’ of the countryside lay with the Labour Party and its immigration policy [1]. That, he said, was the reason why there was no alternative to weakening local councils’ control on new housing development in the countryside. The need for more houses and, thus, the requirement to weaken planning controls, was principally to provide accommodation for immigrants and he had no choice but to facilitate this. But does that claim stand up?

The first question to be considered is whether the number of new homes being developed is hindered by the way the Planning system operates at present, irrespective of the drivers behind demand. As recently as 12th September 2012, the same newspaper reported that developers were “sitting on 400,000 undeveloped plots of land with planning permission.” [2] The Tory Chairman of the Local Government Association, Sir Merrick Cockell, said the figures “should finally lay to rest the myth that the lack of new homes being built is the fault of the planning system… Even if planning departments did not receive another new home application for the next three years, there are sufficient approved developments ready to go to last until 2016 at the current rate of construction.” [3]

If those in charge of the Planning system can dismiss that it is to blame for a lack of new homes, and the revelation that 400,000 homes have permission right now supports that contention, then what is limiting development?

The building industry and most housing & planning professionals are quite clear that there is huge pent-up demand for new homes – but that the main reason for that not being met is the state of the economy. With growth flat-lining (at best), threats to job security increasing and the expansion of low-paid temporary work means that even if adequate mortgage finance was available – and it isn’t – then people simply cannot afford to buy. And if they can’t buy then the developers are not going to build. Is that so hard to understand, Minister?

It is not difficult, therefore, to dismiss the Minister’s case that the Planning system is hindering development. “It’s the economy, stupid,” as a former U.S. President Bill Clinton once said. But does his case that the underlying demand for new homes comes mostly from international migration – and that he is just a prisoner of the previous Labour Government’s immigration policies – have any merit?

The Office for National Statistics produces regular population projections. It considers the changes to the demography of the nation, its numbers, age make-up and household size. The estimates are reviewed periodically but within all the projections is a wide margin of error for international migration because it is so much harder to predict, given its link to economic cycles. And this, can, to paraphrase a banking expression, go down as well as up.

It seems somewhat ironic, therefore, that Nick Boles chose this week to link new housing for immigrants to the need to scrap safeguards for our ‘green and pleasant land’. According to the Office for National Statistics’ latest figures net migration had fallen by 25% in the past year [4]. David Cameron used the results to trumpet the success of his own immigration policy, whilst Nick Boles insists, or so it seems, that he is powerless to do anything about it. Had he been ‘on message’ with the Prime Minister, he might have argued that the success of their approach had lessened the requirement to ‘concrete over the countryside’ and yet he’s argued the opposite to be the case.

The reality is that the two principal drivers for the need for new housing is the growth of single person households and increasing life-expectancy; two not unrelated factors. Indeed, checking the 1911 Census shows that the house I live in now was home for ten people a century ago. It now provides rather less cramped accommodation for two – and a cat. If we want to return to those times, then a return to those levels of over-occupation would indeed limit household growth. And the Tories’ intention to withdraw housing benefits from under-25s shows which direction they think we’re travelling in.

So if the Planning system isn’t preventing development and international immigration – now falling – is not the main driver for household growth, what is the rationale for weakening the ability of local councils to prevent development on previously undeveloped sites? And, note, this latest proposed change comes on top of the introduction of the new ‘National Planning Policy Framework’ [5] that marked a significant shift in the balance of power between council planning departments and housing developers. Indeed, the ‘Daily Telegraph’ itself referred to it as the “builders’ charter” [6] in September 2011.

Having said all of that, even if none of the above is a fair reflection of what has happened since Planning was taken over by the Tories, just about their first act was the abolition of Regional Spatial Strategies – or Regional Plans as they were known [7]. These plans included targets for the numbers of new houses that were required over the coming years. But these targets, along with the plans, have been scrapped. So Mr. Boles would have us believe that he has no choice but to follow targets that have long been abolished. What’s he going to claim next, that he has to collect the Hearth Tax whilst he’s at it?

The run-up to the 2010 General Election saw the Tories campaign against new house building, particularly in rural areas. And Caroline Spelman, then Shadow Secretary of State for the Department of Communities and Local Government, even wrote to Tory councils advising them to hold back from granting permission to new sites that might undermine their anti-development credentials [8].

No, the changes to the Planning system have been implemented with one aim in mind and one only – to allow housing developers to build what they like and where they like, irrespective of local housing needs. And that translates into a simple bottom-line – the bottom-line of the developers. They can be freed up to build on ‘easier’ sites and not have to do any of that other nasty stuff, like building affordable housing.

In that context, the Tories’ relaxation of local democratic controls over councils’ planning powers will make easier the very thing they argued was wrong before the election does appear to be somewhat hypocritical of them. Ok, it’s colossally hypocritical. But we enter new ground when all of this is laid at the feet of immigrants, not known for their plan-making powers.

It is hardly shocking these days to discover another element of Tory/Lib Dem hypocrisy. And the scapegoating of vulnerable groups by them, be they the unemployed, disabled, ethnic minorities, Muslims, gypsies, whoever has long lost its ability to shock, if not enrage. However, this is surely one of the most pernicious acts of a very nasty collection of individuals.

They have played upon the fear of the foreigner, so ably stoked by their friends in the right-wing press, already well-prepped to think that the country is being ‘swamped by houses we don’t need for people we don’t like’. Yet, at the same time, have made it so much easier to achieve the one thing they gained so much political capital out of opposing – the expansion of new housing into rural areas.

I hope people manage to consider the contradictions built-in to the Tories’ position. They blame foreigners for the need to build more homes in the countryside, whilst relaxing the powers that could limit that. At the same time they peddle the myth that the average immigrant is just a workshy scrounger, who only comes here to live off benefits. If anyone accepts this set of circumstances, then they must believe that the average occupant of a brand-new house in leafy southern England is going to be a Lithuanian on Disability Living Allowance. Orwelllian double-think has nothing on them.

If this is an example of what we can continue to expect from Mr. Boles, I would not be surprised if he is thought by some to be risking the incitement of racial hatred. In any event, he is playing a dangerous game pandering to a line being put out by people who most certainly do not even try to hide their personal prejudices. He should be ashamed.



[3] Ibid.