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A major impact of COVID-19 has been a significant increase in the amount of borrowing by the UK government. This will likely have reduced the fiscal headroom available to the government to deliver its desire to ‘level up’ through an expansive infrastructure programme. Government could, for instance, launch one and then be forced to retrench or even abandon it, if say, the markets refused to buy up government gilts at current yields (although at the moment over 80% of new gilt issues are being purchased by the Bank of England, potentially creating inflationary risks). Despite historically low public borrowing costs, there are inevitable limits to the amount of borrowing possible if such market confidence in the UK is to be maintained (even though it is not absolutely clear at what level borrowing becomes problematic). Markets will, however, be rightly concerned that without fiscal discipline there is a risk that debt ratchets up, not only creating an increasing burden for future generations, but creating re-financing risk, in which such a debt burden can only be refinanced at increasingly high interest rates.[1] This would be greatly exacerbated in the event of higher rates of inflation.

An approach that has not been explored is to ring-fence public borrowing for infrastructure, particularly transport and other infrastructure which is paid for predominantly by user charges, rather than by tax receipts (and borrowing). There is a case that this form of public infrastructure should be accounted for and financed differently, not just relative to what is now defined as current expenditure, but also from capital expenditure which does not have a significant user charging component. This is because such infrastructure is less dependent on budgetary resources which are inevitably rationed, with much greater potential to be self-funding, especially where the costs of the infrastructure can be spread out over many years. Rather than rolling over this debt, it can be repaid. By doing so, this creates a financial discipline that can provide markets with confidence and can potentially reduce the need for its rationing.

There are two ways in which this could be realised. One option is to issue traditional government bonds to capitalise a UK National Infrastructure Bank (UKNIB) which would provide amortizing loans to infrastructure projects. At the moment, there is scant detail on how this will operate, but it would seem that is would not just be replacing the EIB which is essentially a low risk, volume lender and instead would seek to take catalytic, higher risk positions in infrastructure projects. This would leave something of a gap in the market; the EIB has traditionally provided up to 50% of the senior debt requirements of many economic infrastructure projects as it has highly efficient pricing (this limit being set to help limit the crowding out of private lenders and debt investors). Whilst the private sector most likely will step in to fill this gap, it will be at a higher cost affecting the affordability of projects. Another approach would be to issue a new form of amortizing public infrastructure bond, which would involve the bond being paid back, rather than following traditional public financing approach of rolling over debt. By mimicking the approach of private sector infrastructure bonds, a repayment discipline will be applied to infrastructure financings. This would balance private sector financial discipline with the attractive costs and tenor of public borrowing.

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