With UK government borrowing at an estimated £120 billion a year it is clear that tax-and-spend will no longer work in terms of investing in order to generate growth.

The Covid pandemic saw governments across the globe borrow through Quantitative Easing (QE) in order to finance the extraordinary situation.

The UK government borrowed some £400 billion in order to get through the crisis mostly via QE.

Very little of that money was invested for the long-term. Most went on furlough payments, business loans and huge quantities of PPE.

Given the current financial situation with a requirement to increase defence spending while also investing in much-needed infrastructure projects, there is a clear need for an alternative public funding model.

I propose that the government, via the Bank of England, creates an infrastructure project fund.

This fund that I name the POst Pandemic ProsperitY (POPPY) fund will total £500 billion created through QE to purchase new government special bonds.

Unlike conventional debt these bonds have an interest rate of 0%. Why bother with interest payments when the money never leaves the public sector.

Instead I envisage these bonds to have a debt repayment rate of 1%. The government will pay £5 billion per year for the next 100 years until the debt is paid off.

The POPPY fund is to finance those infrastructure projects that produce a revenue stream, that the government can ‘tap into’, to help pay the debt repayment.

Examples of projects include

1. New Towns

Construction of new towns that comprise a mix of housing so that homes sold to the private sector generate a profit. Profits are used to build infrastructure that does not produce revenue streams e.g. roads, pavements, GP surgeries, hospitals.
Homes built for social housing will generate rent from tenants.
Shops, business parks, and industrial estates will provide an income stream from rents.

2. Energy

Upgrading and extending the national electricity grid (revenue stream from electricity bills)

3. Transport

New or upgraded railway lines (revenue stream from passenger fares or freight fees)

Airport expansion (revenue stream from shops, car parking charges and landing fees)

Motorway toll roads

All these projects would spur GDP growth.

The downside for such an approach would be to handle these projects carefully so as not to spur either demand-pull or cost-push inflation. For example the economy needs sufficient capacity in terms of carpenters, electricians, bricklayers and the raw materials in order to build the new towns so as not to cause unnecessary wage growth or commodity price increases.

If infrastructure projects were to be funded using this new model then I would expect headroom to be created in the national budget in order to increase defence spending.

With current conventional borrowing at its limit this new model has attractions. £500 billion might sound a lot but set it against total loans across the UK economy of £6,700 billion. Is this an idea whose time has come?

Professor Idea