Dodging the deficit: Spending boost won't appear on balance sheet

The government says the new funding will not damage deficit reduction
The government says the new funding will not damage deficit reduction

By Cassie Chambers

The coalition is making £45 billion of finance available as it attempts to jumpstart the economy.

The Treasury is paying for infrastructure projects without damaging their deficit reduction attempts because the money will not appear on the government's balance sheets.

Ministers claimed the "hard-won fiscal credibility" from austerity has made the UK Guarantees plan, a massive spending project designed to dramatically increase investment in infrastructure and provide major support to UK exporters, possible.

The project is made up of two major lending schemes: more than £40 billion in loans for "shovel ready" infrastructure projects and £5 billion in loans to UK exporters.

The coalition argues government-sponsored infrastructure loans are necessary for economic growth in the UK, as the current climate has made it difficult for private industry to secure funding for projects.

Similarly, the government claims that loans to those who buy UK exports will help make British goods more competitive in a global market.

"The measures we're announcing today will help work get started on many important infrastructure projects and help our major exporters, providing lasting benefits for thousands of people and a significant boost to the economy," said chief secretary to the Treasury Danny Alexander.

Linking the government's ability to undertake this sort of massive spending project to the success of austerity, George Osborne, the chancellor of the exchequer, suggested the programme will have widespread benefits.

"Britain's credibility has been hard-won and involved difficult decisions, so I want to make sure its benefits are passed on to the whole economy," Osborne said.

In order to qualify for funding, infrastructure projects must meet several requirements. These requirements include being ready to begin within 12 months, being declared nationally significant under the government's national infrastructure plans, and being judged to be good value for money.

Yet not everyone is convinced that UK guarantees will be enough to combat the UK's double dip recession.

"With Britain in a double-dip recession because of the chancellor’s failed policies anything which helps to get the economy moving again is welcome. But these proposals do not go far enough," shadow secretary to the Treasury Rachel Reeves said.

She continued: "There is no guarantee that government-backed loans will see any infrastructure projects going ahead in the next year which wouldn't have happened anyway. And they will not reverse the damage done by two years of deep cuts to long-term projects like house building and the school building programme which have seen a collapse in the construction sector."

Reeves suggested that Osborne's support for public-private partnerships, a type of project eligible for funding under the infrastructure scheme, represents another U-turn from the chancellor, as he did not support a similar Labour programme previously.

Many business analysts have also questioned whether the government's approach is the right one.

Several business analysts suggest that the construction industry, one of the sectors hardest hit by the recession, will not benefit from the scheme, since most major projects would not be able to meet the "shovel ready" requirement.

Yet the Confederation of British Industry (CBI), a major employers' organisation, welcomed the government proposals.

"Investment and exports will be the dual drivers of future growth in the UK and this scheme should help fire up both engines," said CBI director-general John Cridland.

He suggested that the loans to those who buy UK exports will be especially useful, as these loans will "make UK exports more attractive" compared to other European countries.

The CBI also praised the infrastructure investment loans in the scheme, which it said will have snowball effects throughout the economy.

"With bank lending still constrained, we must make it attractive for new finance providers to step in and fill the gap.  A combination of direct lending and loan guarantees should help to make infrastructure assets more attractive while protecting our fiscal position," said Cridland.

He added: "Pension funds and other investors will be encouraged by the government’s attempt to reduce risk by using its funding power to boost the investment grade of a range of projects."

Applications for the UK Guarantees programme open today. The coalition suggests that many sectors will benefit from the newly announced loans, including the transport, health, utilities, and communications industries.


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