Leading economist calls on governments to stop shying away from large deficits

By on 18/05/2016
John Kay, visiting professor of economics at the London School of Economics (LSE)

Governments around the world should show greater willingness to run large deficits to get big infrastructure projects off the ground, a leading UK economist has said.

John Kay, visiting professor of economics at the London School of Economics (LSE), spoke out against governments’ “obsession with [reducing] reported deficits” and getting large-scale infrastructure projects off their own balance sheets.

To incentivise private sector investors to take on the financing of such projects, governments often make “ludicrously large” guarantees and get less value for money, Kay said, pointing to the proposed new nuclear power station in Britain. The UK government has promised French energy giant EDF and the Chinese government a fixed electricity price that’s more than double the current market price.

These types of public-private financing partnerships serve only to “hide the reported deficit”, Kay said, adding that the approach “gets in the way of these projects being done”.

Instead, he argued, “when we have a world in which governments of major G20 countries can borrow for 50 years at 0% interest rates, [they should] just go out and do it.”

Speaking in an interview with Global Government Forum, Kay said he didn’t see any merit in getting projects off the public sector balance sheet, arguing that this only leads to governments becoming entrenched in “complex financing arrangements” with the private sector.

He added: “What you want is to pass over construction and completion risk to private contractors rather than private investors, because the private sector is better at managing the projects and the public sector is good at borrowing.”

In the UK, chancellor of the Exchequer George Osborne has pledged to bring down the deficit to zero; but Kay described this target as an unnecessary “self-imposed obstacle.”

 

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About Winnie Agbonlahor

Winnie is news editor of Global Government Forum. She previously reported for Civil Service World - the trade magazine for senior UK government officials. Originally from Germany, Winnie first came to the UK in 2006 to study a BA in Journalism & Russian at the University of Sheffield. She is bilingual in English and German, and, after spending an academic year abroad in Russia and reporting for the Moscow Times, Winnie also speaks Russian fluently.

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