McDonnell was right – borrowing for investment does pay for itself

Channel 4’s FactCheck recently published an article claiming Shadow Chancellor John McDonnell was wrong to say that Labour’s plans to borrow for infrastructure investment would pay for themselves. Other economists disagree.

Reposted with permission from Socialist Economic Bulletin:

The manufactured furore surrounding John McDonnell in the wake of the Budget has a clear purpose. It is designed to distract attention from probably the grimmest set of forecasts delivered in a Budget in the modern era and to deflect criticism from the Tory government.

This is not solely an anti-Labour, pro-Tory propaganda campaign. Contrary to widespread assertions, austerity is not coming to an end and is being deepened. Seven years of falling living standards are not over. The Institute for Fiscal Studies (IFS), very far from being a left-wing thinktank, says that living standards will be lower in 2023 than they were in 2008.

This is a doubling down on the failed policy of austerity. It is therefore important for all supporters of austerity to shift attention from the repetition of a policy that has already failed.

Borrowing to invest

The immediate focus of the criticism of Labour plans was the absence of a specified level of interest of government debt arising from Labour’s borrowing. This is perhaps one of the weakest grounds to attack.

This is because Labour’s Fiscal Responsibility Framework is committed to borrowing solely for investment, and balancing current or day-to-day spending on items such as health and education with current revenues which is mainly taxation.

As a result, all of Labour’s borrowing would have a return. The combined effect of borrowing at low interest rates and investing with much higher rates of return is a net boost government finances, which can be used to increase Investment further. The level of government deficits and debt will fall automatically as taxation revenues grow along with increased economic activity.

Currently, government borrowing over any time period (or debt ‘maturities’ in the jargon) costs less than 2%. This is below the level of inflation, which alone means that the borrowing makes sense. Yet, at the same, the returns to commercial investment are on average around 12%. Any government, or business, which can borrow at such low interest rates for such high investment returns would be foolish to pass up this opportunity. It is reckless and extreme that the Tories have passed up this opportunity.

Of course, no-one can possibly know what the level of interest rates will be in a few years’ time. But the official forecasts from the Office of Budget Responsibility (OBR) suggest only a minimal increase on government borrowing costs (the yields on UK government bonds, or ‘gilts’) over the medium-term.

This is shown in Chart 1 below, with the green line in Chart 3.10 representing the latest forecasts of long-term borrowing costs. These barely move above 2% over the medium-term.

Chart 1. OBR Expectations of UK Interest Rates


In financial markets there is a calculation used to highlight where interest rates are expected to be in a given number of years’ time. Currently, using this calculation of the difference between 10-year gilt yields and 20year gilt yields implies a market expectation that in 10 years’ time, 10-year interest rates will be 2.3%. None of these forecasts can be relied on for pinpoint accuracy. Instead, they are shown to illustrate the point that it is reasonable to assume that government borrowing costs remain subdued for some time to come.

Rates and growth

The fundamental point is that when economies grow strong and especially when there is a risk of inflation, all long-term interest rates tend to rise. If the economy is performing strongly, then the pressure on Labour to borrow for investment when it comes to office subsides to some extent. But that is not what any serious commentator, the OBR, IFS or Resolution Foundation thinks is likely.

Instead, government interest rates fell sharply in response to the grim Budget outlook. This should be read as a ‘market signal’ that borrowing for investment should increase. Bond markets could absorb a lot more borrowing before gilt yields were pushed back up even to their very low pre-Budget levels.

The commitment of the Fiscal Responsibility Framework means it is easy to gauge whether the borrowing is sustainable. The decisive criteria is whether the return on the borrowing exceeds the cost of borrowing. As noted above, the average commercial return on investment in the UK is around 12%, a large multiple of the current cost of borrowing. Only if the cost of borrowing rose above that level would it become unsustainable. This seems unlikely in the foreseeable future.

In reality, the net returns to government from the same investment as the private sector are actually significantly higher. To take a clear example, a private developer who builds homes might get a return of 10-12%. But the same returns are available to government for the same project, while the cost are lower. This is because in the course of construction, income tax and National Insurance is paid by builders and other workers (and there is a return on their consumption too via VAT). This is a return to government which is simply not available to the private sector.

So, John McDonnell is right, and his critics are wrong. Borrowing for investment not only makes sense, it more than pays for itself.


  1. Results of the Conservative Party’s austerity programme:

    Predicted economic growth (OBR)
    2017 – 1.5%
    2018 – 1.4%
    2019 – 1.6%

    Results of Labour’s borrowing programme immediately following greatest economic crisis since WWII in 2008:

    1.7% growth in the economy.

    So, it is clear that the last Labour Government outperformed the current Conservative Government through borrowing.

    Austerity has not only constricted our economy, it has almost doubled our national debt to £2 trillion.

    The Labour Shadow Chancellor’s strategic investment programme offers a path to prosperity for everyone in the country.

    The Conservative party’s economic policy has failed. It is now proven without any doubt that it only leads to lower growth and increased public and private debt.

    These are the facts of the matter.

    1. The national debt isn’t a problem. It’s what allows us to have money in our wallets in the first place. It’s just money the government has created but not taxed back yet. It ‘owes’ it to itself, which as we all know, isn’t a real debt.

  2. Take back direct control of the Bank of England and the government can set the interest rate again, and make their ‘borrowing’ as cheap as they like. Or, as they own the BoE anyway, just have the Bank finance the Treasury directly again once we’re no longer subject to EU law. There’ll be no need to issue debt post-Brexit as the government is the sovereign currency issuer – it creates money itself at will so it can never run out of it.

    We all need to learn about Modern Monetary Theory.

    1. We also need to understand banking. Banks are not what we think and do not do what we think. I do like Richard Werner on this specific subject. Banks have a huge impact on the real economy. it can be positive but for a long time now has been increasingly negative by fuelling boom and bust cycles of private speculation in assets on the back of public insurance. Banks, especially BoE, should be servants of the people and real productive economy not serve one sector of the population and wealthy vested interests. I feel very strongly the revolving door and powerful private vested interest lobbying has to be curtailed so politicians and parliament work for the interests of the whole country and economy as they should.
      I repeat a link to this discussion with Ross Ashcroft, Richard Werner and Peter Buik on the British financial sector.

      I agree the national debt is not a problem when it is for investment purposes but the Tories (and Lib Dems, let’s not forget their role in this and abolition of NHS etc.) have increased the public debt at the same time they impose austerity… I expect much tax revenue is going to pay interest on that public debt with no investment in public sector or real economy so there is no so called multiplier effect and more wealth is drained out of public into private hands.

      Richard Werner speaks in other talks about how EU/ECB is imposing regulations, meant for big banks, onto the small German non profit banks he mentions which serve SMEs. These reams of complicated regulations are onerous for small banks with a handful of employees and they are being forced out of business. The ECB is of course accountable to? No one. We see how ECB/Troika and EU dealt with Greece and the terrible situation they have caused in Greece while Greece is also forced to sell public assets to private entities… same model IMF/World Bank impose on countries around the world once they agree to so called investment loans which have many strings attached.
      The shift of public/national wealth to private supra national entities is happening globally as far as I can see.

  3. Tories operate like the man who thought it was cheaper to not feed his dog – and was then amazed when it died…stupid is as stupid does !

  4. Hear hear, Internal A& Lord Sin but you need to know what we are up against in terms of ignorance and cognitive dissonance. According to Andrew (newspeak) Nill, his opinions and knowledge of economics are superior to that of a professional economist. Please see the current article in the Canary. Nick (newspeak) Ferrari is another with illusions of intellectual prowess in this area. Just listen to him on LBC. I am sure you will get the picture when you have stopped laughing at the self regarding pomposity of his polemic. The problem is their acolytes and followers seem to suffer from advanced Dunning Kruger syndrome.
    I’ve tried logic and irrefutable statistics to highlight the error in their beliefs all to no avail. I guess there is no cure for a brain, washed with Daily Mail dirty and contaminated soap.

    1. The establishment media’s inculcation programme is certainly an issue.

      But there is one arguably more effective thing than the establishment media’s neoliberal propaganda: the self interest of capitalism, put more unkindly – pure greed.

      Capitalists go where the action is.

      Capitalists understand that their bastard offspring, neoliberalism, is in fact their nemesis. Capitalists are becoming increasingly aware that the economies from which they make their profits are being strangled by the neoliberal concepts of austerity, deregulation and privatisation and that they are being cut out of the action as a result, leaving literally a handful of capitalists benefiting globally from those neoliberal policies.

      To make more profits the capitalists need more growth, more productivity, more investment.

      Only one party is offering those things. The Labour Party.

      The real negotiation will be between Labour and business people, from sole traders to international investors. Labour will implement a national strategic investment programme to upgrade this country’s infrastructure and provide cradle to grave education and public services. This will increase productivity and create growth in the economy from which everyone will benefit.

      But the deal is that the growth will be shared equitably.

      That is a deal that capitalists will not get from neoliberalism.

      They would be wise to grab Labour’s offer with both hands.

      The intelligent capitalists already are.

  5. Taxation is not revenue ie government spending is not constrained by the tax paid and nor does the government have to borrow to fund its spending. It’s really as simple as that in MMT terms ie the description of how a modern money system works in practice. It’s a great shame that progressives from Labour to Green ones still couch their laudable agendas in orthodox narratives which do not reflect the fact that that the government is a sovereign currency issuer and has no need to borrow or tax to spend. While we continue with this false narrative we’ll allow the debt and deficit arguments to rule the debate and this will be to Labour’s disadvantage in the end.


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