NIB model an idea for Britain?

by Christian Westerlind Wigström

Britain is struggling to get back on its feet after the financial crisis of 2007/8. Still today, British real GDP is almost 2% lower, in absolute terms, than the pre-crisis peak in 2007. As is the case everywhere, economics is primarily about politics, and since the general election of 2010, politics has made the reduction of government debt the overarching aim of fiscal policy.

The combination of a stimulus-starved economy and an austerity-craving government has sparked a flurry of policy innovation. One of the more prominent policy suggestions debated is the establishment of a publically-owned and privately managed British Investment Bank (BIB) that could be modelled after the Nordic Investment Bank. The suggestion has been discussed for a couple of years but the debate reached new intensity in September 2013, when Ed Miliband, the leader of the Labour opposition, announced that he had ‘set out plans for a British Investment Bank’ at his party conference. Although primarily championed by the left, the BIB (or something very similar) is also advocated by the Confederation of British Industry (CBI), the UK’s leading business lobby organisation.

Across the political spectrum, the main attraction of such a bank is that it performs something akin to magic: it uses public money to stimulate the economy without necessarily violating austerity. You have your cake and eat it. The explanation, of course, is that it leverages a relatively small pot of public subscription capital backed by an implicit government guarantee to borrow private capital at attractive rates.

In doing this, the BIB would tackle the double death of British investment from both directions: (1) by being able to take a longer and wider view on bankable returns it would increase the supply of credit to SMEs as well as large-scale projects with long-term funding needs; and (2) by making a very public commitment to investment it would send a demand-boosting signal to private actors.

So far so good in theory. In practice, however, there are two obstacles to this seemingly elegant solution to the Gordian knot around the Treasury. First, the Government considers the BIB to be expansionary fiscal policy by another name. It argues that under the British public-accounts system the debt of the BIB would be recognised on the Government balance sheet and therefore violate its commitment to austerity. This is a tricky but not impossible argument to win. Yet even if the theoretical argument is won, a second obstacle remains: how, exactly, does one run such a bank?

It is in this context that the NIB has gained attention as a successful case study. Britain treats most things “Europe” with suspicion—particularly given the current state of the euro—but is noticeably envious of the way the Nordic countries handled the financial crisis. Consequently, the NIB has featured in several policy papers discussing the merits of a BIB over the last two years. There are three key lessons that British policy makers can learn from the NIB.

First, when provided with a carefully designed mandate and managed independently, a public investment bank is not a government sponsored competitor to the private banking sector; it is a complement. It can serve as a genuine source of additionality, mitigating market failures which otherwise would obstruct economic and financial performance. The additionality effect is particularly easy to ensure in downturns, but policies such as NIB’s up to 50% co-investment requirement shows that private-sector access to attractive projects can be safeguarded also in an economy operating at full steam.

Second, a relatively small amount of public money can do a lot of good without jeopardising a solid AAA/Aaa credit rating. Maintaining the trust of creditors goes to the core of the British government’s justification for austerity. The NIB’s experience shows that a public investment bank backed by a credible sovereign commitment can enjoy considerable confidence despite a paid-in portion of only 6.8% of subscription capital. It is a cheap way of paying for expensive projects.

Finally, the NIB has shown that far from being a charity institution, a public investment bank can be expected to return a profit; to finance its loans with its lending; and in the process pay a dividend to government backers and strengthen employment and economic growth. Establishing a BIB, in other words, is not another short-term measure to push Britain out of the current stagnation but a long-term initiative to help keep it out of the next downturn.

NIB has shown positive returns in every year but one since its start in 1976; British policy makers ought to be queuing outside NIB’s headquarter in Helsinki.

 

Christian Westerlind Wigström is a Swedish economist with a PhD in international political economy from the University of Oxford. Though currently a business development analyst at a private company in Southern Africa, Christian was an economic advisor and speech writer to Lord Robert Skidelsky in the British Parliament between 2008 and 2013. Christian contributes to the op-ed section in the Swedish broadsheet Svenska Dagbladet on topics relating to fiscal policy and came out with an edited volume on The Economic Crisis and the State of Economics together with Robert Skidelsky in 2010.