Government should not borrow to fund capital spending.

 
 

 

The idea that government should borrow to fund capital spending, like a bridge, is a popular one. After all, households and private sector employers often borrow to fund such spending, so it might seem that government should do likewise.

However, one weakness in the latter argument is that private sector entities DO NOT always borrow to fund capital spending. For example if you want a new car and happen to have enough cash to pay for it, why borrow?

So borrowing, it would seem, only makes sense if you’re short of cash. But governments ARE NEVER short of cash in the sense that they can grab near limitless amounts of cash from taxpayers any time, plus they (along with their central banks) can print and spend a certain amount of money most years.

As for how much government SHOULD CHARGE those who use government funded capital projects, like a bridge, there is no question but that the charge should be enough to pay for whatever interest a private contractor would have had to pay to build the bridge or whatever the item of capital investment is.

Of course sometimes it is not feasible to charge those using a particular publically owned investment in the same way as people are sometimes charged at toll bridges. But in that case, the amount that a private contractor would have had to pay by way of interest should still be taken into account when deciding what bridges or other items of public investment are worthwhile and which are not.

To summarise, in the ideal world, the amount people are charged for using publically owned assets should not be influenced by whether those assets were originally funded via tax or government borrowing: i.e. they should be charged an amount that covers interest REGARDLESS of whether interest was actually paid or not.

And that in turn means that if government DOES TRY to borrow to fund capital projects, the only net effect is to enable the cash rich to lend to the less well off. But the rich can lend to the less well-off anytime ANYWAY!!! So what’s the point of government facilitating or encouraging the latter process, i.e. encouraging the less well-off to go into debt?

All government is doing there is in effect acting as a banker – a banker which is artificially powerful in the sense that government bonds are artificially secure because government has the right to grab near limitless amounts of money from taxpayers anytime if any government funded projects go wrong. Normal private sector bankers do not enjoy that luxury.

 

Conclusion.

My provisional conclusion is that government should not borrow to fund capital spending, though others may well spot a flaw in the above argument.!!

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