Tags
Economics, finance, Hs2, infrastructure, news, Politics, Railways, Rishi Sunak
This is a rewrite on a much earlier blog which is now out of date due to a changing financial world, but where the basic economic rules still apply. Rules that our (hopefully soon to be Ex) Prime Minister – despite his time as Chancellor of the Exchequer – seems to be unaware of. More likely? He’s gaslighting you. Let me explain…
What are Capex and Opex – and why does the difference matter?
Capital expenditure is an expense incurred to create future benefit, such as buying new assets for a business – like buildings, machinery or equipment. Doing so generates profits for the future over several tax years. Hs2 is a very good example of the principle. It will generate jobs (which generate tax revenue), kick-start regeneration in some of our major cities and make the UK a more attractive place for businesses (which generate corporation tax). Capital investment on decent infrastructure is well understood as bringing economic benefits. This BBC article sums up the situation. As capital expenditure will generate tax revenue year after year it’s not just a one off. That income stream would enable the Treasury to spend money on many different things, from the NHS to social welfare, to more modern infrastructure and even tax cuts if it so chose.
Operating expenditure covers the day to day functioning of a business, like wages, utilities, maintenance and repairs. It also covers depreciation. It’s money needed every year. It’s not a one-off – and it doesn’t generate any extra income the way Capex does.
The UK has a poor record for capital expenditure on infrastructure. It’s why so much of the countries infrastructure is old and outdated (like the railways) and why our productivity is so low.
The OECD (Organisation Economically Developed Countries) recommends that baseline infrastructure investment is 5.5% of GDP annually for an economy with aspirations to growth. We’ve only spent this amount twice since WW2. This is especially relevant now as the UK desperately needs to invest in ‘green’ infrastructure to both tackle and be resilient to Climate Change. HS2 was one of the projects that ticked all these boxes. The importance of such investment has been thrown into the spotlight by the recent storms that have closed railways and flooded large parts of the country. We need modern infrastructure designed and built to cope with them.
Now to the present. Rishi Sunak has announced he’s ‘scrapping’ HS2 and diverting the capital expenditure to operating expenditure, like filling potholes and subsidising bus fares. It’s economic madness, but it’s also a con as the ‘diverted’ money doesn’t exist. There’s no pot of money sat in the Treasury labelled ‘for HS2’ that’s waiting to be diverted elsewhere. HS2 is funded from Government borrowing and the money for the sections of HS2 Sunak has cancelled isn’t on the Governments books as it wasn’t due to be borrowed for many years yet. It’s fantasy money, as real as the stuff you play Monopoly with. Sunak knows this, but he’s taking voters for fools as he also knows most people have no understanding of either economics or Government finances.
Sadly, much of the media is helping him perpetuate the con by lazily copying and pasting his claims and not once asking any awkward questions, informing people of economic basics (like Capex and Opex) or doing any analysis of his claims.
Don’t be fooled.
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