The Chancellor's double ended telescope only produces mirages

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When, as a child, I first discovered the wonder of telescopes, it was like a form of magic. Making far away things seem closer, or small things look bigger, was fascinating enough, but then to discover how the opposite happened when I looked through the ‘wrong’ end of one of these marvellous devices was an added bonus. But nothing that I ever discovered about telescopes could have prepared me for the amazing lenses possessed by the Chancellor of the Exchequer, which were on display yesterday as she announced the outcome of the spending review. She – and, apparently, most of the others around her – are in possession of a device which enables them to look through both ends simultaneously, magnifying those things which she wants to magnify, and minimising those which she would rather forget.

There can surely be no-one, not even the Chancellor herself, who seriously believes that the nuclear power station which she announced (or should that be ‘re-announced’?) will be built in anything like the costs or timescales quoted. One doesn’t need to be some sort of Nostradamus to be able to predict, with a degree of confidence indistinguishable from 100%, that the eventual costs and timescales will be higher, and considerably so, than any figure which escaped her lips yesterday. The degree of confidence that the sums quoted for all the other infrastructure projects announced yesterday will be exceeded might be slightly lower, but still a pretty safe bet. All the timescales and costs announced yesterday have been examined through the wrong end of the telescope.

When it comes to the advantages, however, the right end of the telescope has been deployed with a vengeance. The improvements to people’s standard of living, the number of jobs created: these are things which have been miraculously magnified. There will be no surprise if, like another announcement from recent years, they are quietly revised downwards in due course.

Some of the government’s over-excited comments on the flood of electricity which the new power stations will generate come close to the promise in the 1950s of electricity ‘too cheap to meter’. Even if the phrase has been misunderstood, and its original author was actually talking about fusion rather than fission, the phrase was widely used at the time – including by proponents of nuclear expansion – to describe an impossible energy utopia. In yesterday’s announcements, the costs of decommissioning the stations at the end of their lives, and of handling and storing the radioactive waste seem to have been subjected to their customary level of examination: none. Those issues remain where they have always been – a problem for future generations. Unlike the national debt, however, these are foreseeable liabilities which are not balanced by matching assets; they really are a financial black hole. Throwing good money after bad on nuclear power might look good on a spreadsheet keeping a running total of ‘investment’ spending, but the real cost is in not doing the other things that could be done instead. And probably more quickly.

If I had to pick a stand-out impression of what the government had to say yesterday, it would revolve around that timescale issue: it’s all jam tomorrow, with the lack of butter today being glossed over. The timescales – let alone the consequent benefits – of the capital spend are largely beyond the event horizon for the current government. If there’s one thing that’s almost as certain as the cost and timescale over-runs which are going to occur, it is that future governments (even if, by some miracle, of the same party) will delay or cancel some or all of the projects for which funding was announced yesterday. None of that means that some of the announcements are wrong in themselves: both Wales and the UK need the investment in infrastructure such as rail, for instance. But the belief that promising such investment over a lengthy timescale will somehow persuade people to tolerate the austerity measures baked in to yesterday’s review suggests a complete lack of connection and empathy with people who need relief today.

Following the money

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Trump’s attitude to the stock markets varies. When the US stock markets are riding high, Trump is quick to claim it as a vindication of his brilliant economic policies. When they take a dive (as they have done a few times recently, usually in response to wildly fluctuating tariff policies), he claims that he doesn’t pay any attention to what the markets are doing. If his chosen indicator doesn’t show the result he wants, then (like Groucho Marx with principles) he has others.

Whether a stock market movement in a particular direction is a good thing or a bad thing depends on one’s perspective, but it really isn't a very good measure of economic success. For those whose wealth is measured largely in terms of the value of shareholdings – such as, to pick names almost entirely at random, Elon Musk or Donald Trump – a fall in share prices can suddenly make you look a lot poorer, whilst a rise can make you look a lot richer. So: from that perspective, rising share prices good, falling share prices bad. On the other hand, for a wealthy person who wants to acquire more wealth, falling share prices creates good opportunities to buy up assets cheaply, especially if you know, or have reason to believe, that any fall (such as that induced by an on-off tariff policy sending prices yo-yoing) will be followed by a rise. And that’s true, even if there is no insider trading happening.

It underlines one of the issues with a casino-style stock market. Traditional economic theory suggests that the stock market is a means of matching available capital with investment opportunities, but it’s long since become divorced from that (which is why the government’s floated suggestions of replacing cash ISAs with stocks and shares ISAs do not achieve the aim of getting people to invest in businesses). In a casino stock market, share prices no longer bear any clear relationship to the value of the underlying assets. For some investors, there is at least a partial relationship with expected future profit flows in the form of dividends, but day to day share prices depend mostly on expectations of the way those prices will move, with the gamblers and speculators more interested in making money from large and frequent trades on small marginal changes in share price than in the future prospects or dividends of the company whose shares are being traded.

The result is that there are a small number of people making a great deal of money out of Trump’s capriciousness. By what I’m sure is nothing more than complete coincidence, many of them will be among Trump’s donors and supporters. Who’d have thought it?

Borrowing and investment

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Yesterday’s Sunday Times carried what appeared to be an almost blow-by-blow account (paywall) of who said what in a crisis meeting of the Cabinet last week called to discuss Brexit.  The extent of the leaking of what are nominally ‘confidential’ discussions (the paper claimed at least six different cabinet sources just for its reporting of what the Chancellor said) shows how power and influence are ebbing away from the Prime Minister, with her underlings keen to parade their credentials in the inevitable battle to succeed her.

But if the leaking in itself showed an increasing detachment from any idea of collective responsibility, some of the proposals apparently made look like desperation is setting in.  One example was the claim that the transport secretary put forward a proposal to give everyone in Britain a Brexit bonus of £200.  Given the fact that any suggestion of there being a Brexit bonus has been well and truly debunked many times, it is unclear where he thought this money was coming from, but bribing people with their own money doesn’t look like honest government. 

One minister, Andrea Leadsom, reportedly did come up with a proposal to raise some money: the government should sell ‘Brexit Bonds’ to get people ‘investing’ in the government. (And of course, if each of us ‘invests’, say, £200, the government will have enough money to give us all a ‘Brexit bonus’ of £200 – the sad thing is that some might even be taken in by that one.)  ‘Selling bonds’ is something the government does all the time.  Whether labelling them as ‘Brexit’ bonds would make them any more saleable or attractive is doubtful, but we do know that the government can, at the moment, sell as many bonds as it wants to; people and institutions are queuing up to buy them.  It is one of the main routes by which government raises money, although it’s more usually called ‘borrowing’ - because as any accountant or book-keeper will be aware, anything that looks like an investment to one party will look like a loan to the other.

Calling on people to ‘invest in the government’ may have a nicer ring to it than ‘the government should borrow more’, but it amounts to exactly the same thing.  I welcome any recognition in government that they can and should borrow more to invest in services and infrastructure; I just wish they weren’t in a position where they have to do it to pay for the folly of Brexit, let alone in order to try and trick us into thinking we’re getting some sort of bonus.

Trashing government economic policy

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Since Cameron was first elected in 2010, the orthodox economic policy of the Conservatives has been that the budget deficit must be first eliminated and then turned into a surplus so that the national debt can be repaid.  This is one of the few things on which they have been entirely consistent from the outset – the only changes to the policy have been in relation to the timescale.  The glorious days of surplus are continually pushed further and further into the future.  The Labour Party, partly out of fear of being branded financially irresponsible, but mostly because they suffer from the same version of economic dogma as the Tories, have supported the same aim of deficit reduction differing only at the margins on issues such as the balance between tax rises and spending cuts.  They share the same key aim of deficit reduction as the Tories.

Whilst there is a sensible argument to be had about what the appropriate level of deficit (and debt) should be in relation to GDP, and about the timescale over which any change in that ratio should occur, the underlying assumption (that the government should aim to ‘balance the books’) is, and always has been, complete nonsense.  As history shows, a budget deficit is the norm, and depending on the rates of growth, interest and inflation, a continuing deficit is entirely sustainable.  Indeed, since (as all accountants will realise) the net level of borrowing in the economy must effectively be zero, a public surplus can only be financed by debt elsewhere.  And it is noticeable that, as the public deficit reduces, household debt is – as one would expect – increasing.  What looks to the government like debt appears to those of us with pension funds to be investment, and there is still a queue of people lining up to lend their money to a government which is increasingly unwilling to take it.

The deficit fetishism of Tory and Labour alike is what leads to the policy of so-called ‘austerity’, and, as ever, it is those at the bottom in economic terms who suffer most, whilst those at the top are able to protect themselves or even further enrich themselves.  It isn’t the only possible approach, no matter how many times they argue that ‘there is no alternative’.  In an attempt to regain the momentum which his leadership campaign has so carelessly thrown away, Boris Johnson has this week suggested what is presented as an alternative approach, namely to slash taxation drastically.  He doesn’t say, of course, how he would pay for this, but his comparison with the Trump tax cuts in America at least suggests that he is supporting a huge increase in public debt.  If that’s what he really proposes, then it really does trash the policy which he and his party have been supporting for the last 8 years.

Whether it would work or not is another question entirely.  For some the jury is still out; the US economy may appear to be booming, but the extent to which that is down to the tax cuts is arguable at the least.  What we do know is that corporations and the wealthy have benefited tremendously.  It’s a policy which treats ‘trickle-down’ – the idea that if the wealthy have more money, then everyone else will also benefit eventually – as an article of faith rather than depending on any evidence of wider benefits.  It does, though, benefit the likes of those who advocate such a policy and those who move in their immediate circles; they have a large personal incentive to be true believers.

But, if reducing the deficit quickly and immediately is not the absolute priority as which it’s been painted, there are other ways of managing the economy.  Portugal is an interesting case in point.  Instead of following a policy of cutting spending, the Portuguese government has chosen to follow a policy of investing more in public infrastructure.  Not only has it boosted the Portuguese economy, it has also provided another route to deficit reduction as well as reducing inequality and promoting economic growth.  Those who consider all state spending to be inherently a bad thing start with an ideological perspective which blinds them to the possibility.  But state investment can, ultimately, generate more in benefits and revenue than it costs.

It’s a lesson that I don’t expect the Tories to ever be able to learn, and even Labour seem to be struggling with it.  There is also another lesson here for Labour in particular: Portugal’s membership of the EU hasn’t prevented them from following an alternative path.  The EU’s rulebook does not preclude the sort of state action which they have taken, yet the belief in some Labour circles that the EU places such constraints on member states is what leads them to support Brexit.  It’s an idea which is as divorced from reality as deficit fetishism itself.

Give us the money?

Tweet The Welsh Affairs Committee at Westminster told us yesterday that the UK Government had saved at least £430 million by not electrifying the railway line between Cardiff and Swansea, and suggested that the whole of the money saved should be made available for other transport schemes in Wales.  I’ve got a better idea: if the whole of the money saved by not electrifying the line is available for spending on transport schemes in Wales, why don’t we spend it on electrifying the line between Cardiff and Swansea?  Because, at its simplest, if the cash is available, why not spend it as originally planned?

It wasn’t a lack of money which, allegedly, drove the decision to cancel this part of the electrification project, but an analysis of the cost-benefit ratio, which concluded that the scheme was not good value for money, using the criteria laid down by the government itself.  But whether those criteria are valid or not is ultimately a question of judgement.  They are based, broadly, on a comparison between the cost of doing the work and the value of the time saved by passengers; but given the well-known problems of the railway line west of Cardiff, the time savings were always going to be minimal for that section of track.  It’s much harder to put hard cash values on other benefits of the scheme, such as increased reliability and reduced environmental costs - both from moving away from diesel and attracting more traffic from the roads.

However, the idea that money, once allocated to a scheme in Wales, should be available for other schemes in Wales if the original scheme is cancelled is one with which I’m hardly going to disagree.  The logic of that, though, is that the money and the responsibility should have been allocated to Wales in the first place.  Then we could have decided whether to electrify or not.  The strangest part of all in the story from Westminster is that the man demanding the money comes to Wales anyway is historically one of those most opposed to devolving extra responsibilities to Wales.  Still, he’s a Tory – logic and consistency are not to be expected.

Sharing the eggs between the baskets

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Last week, the leader of Cardiff Council told us that the City of Cardiff is ‘Wales's best economic asset’.  As is ever the case, such terms need more precise definition before being accepted uncritically, but in the sense that Cardiff and the area around it is the wealthiest part of Wales and contributes most to GVA, then I agree with the statement.  That isn’t the same as agreeing with the conclusion, however, which seems to be that Cardiff should therefore receive a disproportionate share of future investment to make it even more successful and wealthy.  There are two main reasons for rejecting that conclusion.

The first is that it ignores, or overlooks, the question of how that situation has come about in the first place.  There is nothing inherently special about Cardiff which means that it has become wealthy while the rest of Wales has not (in the same way as there is nothing inherent in being Welsh which dooms us to being one of the poorest parts of the UK).  One of the reasons for Cardiff’s greater success has precisely been that it has already received a disproportionate share of past investment.  Imagine for a moment replacing Cardiff with London, and saying ‘As the result of previous wealth concentration, London is the UK’s best economic asset, therefore future investment should be concentrated there’.  As a statement of current UK government policy, it looks pretty accurate, but most of us in Wales would reject that as a basis for determining future investment strategy.  Why would we want to simply replicate that in Wales?

The second is that, ultimately, such an approach amounts to seeing the future economic growth of Wales in ‘average’ terms.  That is to say that Wales, as a whole, looks better off if the average GVA per head increases, and the easiest way of achieving that might well be to put the investment into those areas where GVA growth is potentially the fastest.  But improving the ‘average’ GVA per head isn’t the same as making everyone in Wales better off.  Indeed, it is perfectly possible in mathematical terms to increase the average whilst decreasing the actuals across most of the country.  And sometimes it even looks as though government policy is to attempt to prove that mathematical theorem in practice.

That isn’t to say that Cardiff shouldn’t receive a ‘fair’ proportion of future investment (although defining ‘fair’ is a major topic in itself, far more complex than mere headcounts).  But any Welsh government which was serious about sharing prosperity would be looking to a strategy which improves life for all the people in Wales.  And that can’t be measured simply in averages.

What if they don't want their money back?

Tweet Implicit in what many politicians say about eliminating the deficit and reducing debt is that they want the government to repay the money it has borrowed.  But I wonder if they’ve thought through the consequences of that – what are the consequences for others of a government surplus?

There are two obvious consequences of a current account surplus in the public sector.  The first is that the ‘rest’ of the economy – the private sector, in essence – has to run a corresponding deficit.  Whether that’s a good thing or not is a matter of opinion, and depends on the economic circumstances at the time.  But the fact of it is inescapable.

The second is that it means that government debts would be repaid.  But what if those to whom the debt is owed don’t actually want to be repaid?  The outcome of repaying debt might not be as positive overall as some seem to assume.

The UK is not in a position where it is scrabbling around at the end of every month to borrow more money to pay the month’s bills, although I suspect that is not far off the image which many have.  On the contrary, people are queueing up to lend money to the government.  One person’s debt is another person’s investment, and UK government ‘debt’ is seen as a very worthwhile investment by the lenders.

Much of the government’s debt is held by institutional investors, including the pension funds of those of us who’ve been contributing over the years.  And pension funds like the safety and security of government debt, even if the rewards are low, because it enables them to commit with certainty to paying pensions.  (And, as an aside, it also means that much of our pension funds are already being invested in public projects, just not as directly and obviously as some might like.)

But if the government insisted on redeeming its bonds and paying down its debts, then those institutions might find that they either have to invest more abroad, or else invest in riskier ways.  That might not be the best outcome for the population as a whole, never mind current and future pensioners.

I accept, of course, that not everyone is in the same position (although recent changes to pension rules mean that an increasing proportion of us are going to be dependent at least in part on investments for our pensions rather than current tax revenue).  And I’ll accept that some might see advantage in a trade-off which reduces government interest payments even if it leads to less secure pension arrangements.  But my point is simply this: most of the UK’s public debt is actually owed to the citizens of the UK in one way or another, and most of those to whom the money is owed are not only not demanding repayment any time soon, they’re lining up to lend the government more.

Government budgets are not at all like household ones, and talking as though they are is less than helpful.  Reducing debt isn’t always the right thing to do.

Cardiff, Cardiff, Cardiff...

Tweet The plans for the revamp of Cardiff Central station are ambitious.  They are also likely to be very expensive.  It’s not a plan that I’d oppose in principle, but I don’t agree that it should be the next priority for the network rail investment programme.

I understood why electrifying the main line from Paddington to Swansea should be a top priority.  I can also understand why the lines running through the South Wales valley should be the second priority.  But there are still unelectrified lines in west and north of Wales, and I cannot understand why the scheme to electrify those is not being brought forward ahead of the revamp of Cardiff station.

I try to avoid falling prey to simplistic regional jealousies pitting one part of Wales gets another.  And given the concentration of population and employment in the south-east, the status of Cardiff as the capital, I can understand the logic of an electrification scheme which serves that area first.  It shouldn’t end there though, and a desire to avoid internal competition shouldn’t become an abject acceptance that all investment goes to one corner.

The comment made by the Institute of Directors (“If Cardiff is to compete with other cities in the UK and internationally for investment, then it really needs a train station that is as good as anything else”) sounded like a reprise of why we have to build the extra M4 around Newport, why we have to create a city region based on Cardiff, and why we have to build the Greater Cardiff Metro.  How many more things does Cardiff “need” because we will not get economic development without them, and when will Cardiff have ‘enough’ grand schemes to allow serious investment elsewhere in Wales?

It increasingly looks as though the answer is never – no sooner has one key problem been overcome then another one gets pushed to the fore.  There will always be another key obstacle to Cardiff's development which the rest of Wales will have to pay for, as funds are directed to that one corner of the country.

It’s hard to deny that Cardiff is receiving a substantial devolution dividend, but what about the rest of Wales?  Replicating the south-east bias of the UK was never anyone’s stated intention – yet that’s where we seem to be going.

Destructive jealousy

Tweet I don’t really understand why people are getting so worked up about the clear conclusion that if some areas of the UK benefit from the development of the new HS2 rail line, other areas of the UK will lose.  That is surely an inevitable concomitant of any investment in improved infrastructure – ‘extra’ economic activity in one place is lust as likely to be ‘displaced’ economic activity from somewhere else as it is to be genuinely ‘extra’.  Justifying a project on the basis of the competitive advantages derived in one place has an inevitable concomitant elsewhere.

I particularly don’t understand the knee-jerk reaction of some which is to argue that because some areas lose out from a particular investment, then that investment should not proceed.  It’s a bit like saying ‘because we can’t have it neither can you’.  Surely the more constructive responses to say ‘if you’re having it we want it too’?

My biggest reservation from the start about the HS2 proposal has been that it has been put forward as a stand-alone project rather than part of an overall strategy.  I can understand other areas being ahead of us in the queue, but my concern is about the fact that we don’t even seem to be in the queue at the moment and nobody seems to be putting the case that we should be.  Rather than opposing a scheme which will benefit others surely it is far more productive and constructive to demand inclusion of Wales in the longer term plans.

There’s a danger in the attitude being displayed here that infrastructure investment becomes a race to the bottom.

The end of always?

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There is nothing new about the fact that big businesses in the UK are sitting on enormous piles of cash.  Dylan Jones Evans is amongst those who’ve drawn attention to it in the past, and I posted on that last year.  It looks as though at least some around the cabinet table are starting to understand the issue as well, given Philip Hammond’s attack on the businesses concerned this week.

I’m not at all sure, though, that criticising the leaders of those businesses for being unprepared to take risks is the most constructive or sensible response.  The question we need to ask is whether the investment opportunities are there or not; the criticism being voiced assumes that they are.  I suspect that they might not be.

There are opportunities to spend money, of course.  They could always take over, or buy into, other companies either at home or abroad, and doing so would increase the size, turnover, and maybe even profits of the companies concerned.  But it would just move the surplus cash from one set of accounts to another; it isn’t really investment in growth.

But what if the opportunities for real expansion don’t actually exist?  There are plenty of economists who would argue that to be the case at present, and maybe the case for some time to come.  What few are really planning for though is a scenario in which that remains true for the long term.  That would require a major shift in economic thinking.

History to date shows that the economy ‘always’ recovers from a recession and resumes its long term growth path.  But the fact that something has ‘always’ happened in the past is no guarantee that it will happen in the future.  Sooner or later we will reach a limit to ‘perpetual’ economic growth – who’s planning for the possibility that it has happened?

Wrong priorities

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The announcements by the UK Government last week about rail finances serve only to confirm a lack of real commitment to public transport.  Faced with a demand which exceeds the supply at peak hours, their response seems to be the classic piece of economics – increase the price until the demand drops to match the supply.

There is scope, of course, to stagger the peak hours more effectively by encouraging companies to work more flexibly, and that would make better overall use of resources.  I doubt, however, whether upping the price of peak hour public transport is going to be the most effective or efficient mechanism to achieve that.

Pricing people off the railways will only increase roads congestion, and lead to yet more calls for more road-building.  What is actually needed is a plan to increase rail capacity, in order to reward and encourage the growing trend to the use of public transport, but they seem unwilling even to consider that.

Comparisons with the cost levels of railways in other countries may be interesting; but in themselves, I’m not convinced that they tell us much, since the circumstances are so different.  In any large organisation, there will always be some degree of inefficiency and therefore scope for doing things better, but it seems like the wrong thing to be putting centre stage at a time when we really need a cohesive plan for investment and improvement.

So, certainly there are smarter ways of handling ticketing in an increasingly computerised system, and it would seem sensible to pursue those; but we shouldn’t be waiting to drive out cost before we look at how we expand and improve the service.

Getting there eventually

Tweet It took a while, but the real cost of PFI has finally been recognised by an all-Party committee in the House of Commons.  It is, as many of us were saying all along, an expensive way of borrowing money, became little more than a device for keeping debt off the balance sheet, and should be scrapped.  And some of those who were egging the Welsh government on to not spurn this source of investment capital should feel more than a little egg on their own faces.

No surprise that the CBI want to keep the system; after all, the organisation’s members benefited from it by making greater returns on investment than would otherwise have been the case.  It’s a little misleading to suggest though that this was the only way of attracting private finance to invest in infrastructure.  After all, much of what the government borrows to invest directly comes from private finance – it just doesn’t pay as well.

The other argument for PFI was that it enabled the government to reduce its financial risk.  There is, indeed, an argument – in principle at any rate – for paying a higher effective rate of interest if the project is lower risk, or even risk-free.  It’s a calculation which is complex, but a transfer of financial risk to someone else can justify paying a greater return to them.

The problem with PFI though was that there was little or no transfer of real risk.  The customer – us – remained exposed to most if not all of the risk, and at an often increased level of risk due to the higher cost.  The suppliers of capital, meanwhile, found themselves with a fairly low risk cash cow.  Why wouldn’t they want to keep that system going?

The question now is what happens next.  Will the government do as it has been advised, and buy its way out of these contracts, or will they remain a financial milestone for years to come?

Borrowing and investment

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That there must be limits to economic growth is self-evident, but pinning down precisely where and when those limits will be reached is considerably harder.  Whilst pretending that we can carry on and simply ignore the issue is foolish complacency, there is a danger that those of us who take an alternative view can sometimes sound a bit like American fundamentalists looking for evidence of the End Times.

To listen to Vince Cable, one would think that economic recovery depends largely on a willingness by the banks to lend more money to businesses for investment.  I’m not so sure; and not solely because it sounds like a return to the excessive lending which was part of the reason for the crash in the first place.

Dylan Jones Evans pointed out about two weeks ago that “it is estimated that large companies in the UK are currently sitting on around £65 billion of cash within their balance sheets”.  As far as big businesses are concerned, at least, it isn’t simply a matter of lack of access to capital.

Dylan puts the lack of investment down to this stuff called ‘confidence’ – or rather, the lack of.  I’m not so sure, although I suppose it depends on confidence in what.  But I wonder whether there isn’t also a serious lack of investment opportunity at present.

My doubts were heightened by the reported comments of another well-known Welsh-based economist, Patrick Minford (coincidentally in the same edition of the Western Mail), in which he suggested that we could be in for a long period of readjustment, and that the global economy simply cannot expand any more at present.

It certainly seems likely that we will be facing a world in which countries such as China and India use a growing proportion of available resources, and probably without a significant increase in the total availability.  It’s also likely that they will be meeting higher levels of domestic demand as well. 

Price rises for many commodities and raw materials would be an inevitable consequence of the former, and for finished goods of the latter.  It’s hard to see where demand is going to come from in our own economy if we have both rising prices and falling real wages.

Faced with a possibly lengthy period of stagnation, Plan B needs to be about more than a difference in the speed and size of public sector cuts.

Electrification - let's get on with it

Tweet My initial reaction when I read the part of today's story about the electrification of the mainline was a degree of outrage at the idea that the UK Government would ask the Assembly Government to pay part of the costs.  But then I asked myself whether this expenditure is Barnettised or not - and I have to admit that I don't actually know the answer to that.  If this is additional UK expenditure, over and above the existing transport budget, then the reaction stands; but if the expenditure is coming out of the English transport budget for which Wales has already had, or will be receiving, a Barnett share, then it it not entirely unreasonable for the UK Government to start talking to the Welsh Government about a contribution.

What is absolutely clear, though, is that asking the Welsh Government to pay a proportion is not a way of delivering the project for "less than the £1bn initially estimated", which seems to be the UK Government's starting point.  Paying out of different pots is simply not the same thing as reducing the cost - and disingenuous is an understatement for the suggestion that it is.

I'm clear that there is a good case for electrification - greater reliability, lower maintenance costs, less pollution.  It helps meet emissions targets (depending on how the electricity is generated), and it helps the switch from road to rail.  And there's a good case for the timing; with the rolling stock needing replacement in the next few years, failure to electrify now condemns us to another 40 years of diesel powered railways.  Electrifying the whole railway network as rapidly as possible is something which deserves support.

I'm not entirely convinced that 20 minutes off the journey time makes as much difference as some seem to suggest.  Certainly I, like most other people, like to get from A to B as rapidly as possible, but when I was travelling fairly regularly from South Wales to London it was the lack of certainty about the arrival time which was much more of a concern to me.  Having to catch a train an hour earlier 'just in case' is a real deterrent.

And I'd like to see research which indicates that this will have the massive impact on economic growth which some seem to imply - particularly if the Welsh Government is serious about switching its economic strategy to development of indigenous companies.  I'm not suggesting that it won't have an impact, merely that the impact may have been somewhat exaggerated.

And we simply don't need to exaggerate or play the victim; the project stands up without that.

Investment begins at home

Tweet The collapse and nationalisation of an Icelandic bank has obviously caused problems for a number of local authorities in Wales. Some people have suggested that the councils concerned have made unwise decisions about where they placed their funds. The leader of the WLGA, John Davies from Pembrokeshire has said that "It would be wrong to apportion blame. These investments are done with sound advice behind them.", and on this occasion, I agree with him. The bank appears to have met all the relevant lending criteria which councils are advised to follow, and councils have merely been attempting to obtain the best return that they could get.

What I do question, however, is whether it is right that we allow – let alone encourage - councils to place their deposits overseas at all.

I understand the councils' problems; they receive part of their money in large blocks, and they also have to keep prudent levels of reserves for emergencies. As tax-payers, I'm sure we would all prefer that that money was earning interest rather than sitting idle, and we'd want them to be getting the best return. The nature of such investment by councils is also relatively short term – individual councils need to be able to get their hands on the money fairly quickly.

Nevertheless, I still wonder. As I've argued before, I think the biggest economic problem we face in Wales is how to get our GDP per head up to at least the UK average level. I don't see how depositing Welsh assets in foreign banks, even in the short term, is making much of a contribution to that end.

Clearly, given the constraints upon them, councils cannot directly use these funds for long-term investments which would lock up the cash, but perhaps if the councils and other authorities involved were able to act in a more collective fashion, they would have more flexibility overall. The sums invested in Iceland are large, but they're still just a fraction of the total which has been deposited in banks by Welsh authorities. The overall total fluctuates throughout the year, reflecting cash flows, but on any day of the year, there is still a sizeable amount of our money invested in banks and building societies, some of them foreign.

Retaining the money within Wales might well lead to a marginally lower return on investment for the authorities; but if the result was an improvement in the Welsh economy, the overall result for taxpayers would be beneficial. Put another way, 'best rate of interest for authority X' may not be the same as best value for the Welsh economy.

Instead of individual councils stashing away their own cash, why not pool the temporary surpluses of all Welsh public authorities and use at least the core minimum which will always be present to invest in the Welsh economy?