Housing and biogas – a Plan B for the economy?

By Ed Conduit and Tony Winters

The balance between public spending and income needs to be better understood by Labour supporters. Ed Balls’ proposal to build 100,000 council houses is about half right in terms of economic recovery. The addition of power generation might give the best return on public spending and make a viable Plan B for the economy.

House-building is thought to have been the main driver of British recovery from depression in the late 1930s.The USA provides another model for economic recovery: the Hoover dam and the Tennessee Valley project had their first effect in creating employment in the construction industry.  Cheap hydro-electric power was the next effect.

Public spending in most areas at the present time does not generate much revenue for the government. Commissioning hospitals or schools would certainly favour the construction industry, but provide a new service for unchanged demand. Building road, rail or seaports might reduce transport costs and hence have an effect on the cost of goods. Transport in Britain is congested and slow, but it is not clear what road or rail projects, including HS2, would significantly reduce the cost of UK goods.  An additional snag is that reducing transport time favours imports and exports equally, and the UK imports more finished goods.

Electric power generation may have the biggest Keynesian multiplier effect. Hydro-electric schemes are a possibility in some hilly areas.  Photovoltaic panels have high initial cost and negligible effects on UK employment, but thereafter generate power with little additional cost. Nuclear power stations would have a time scale of two decades or more, so would have little effect on economic recovery. There are other possible sources of power, but none are closely competitive with methane gas. North Sea gas has now passed its peak and future supply is uncertain. Imports from Qatar to South Wales now make up 20% of UK consumption.

Biogas is probably the most efficient, though not exactly glamorous, way of generating electricity. Methane can be collected over landfill sites, or from anaerobic digesters. Both release gas which is a mixture of 60% methane and 40% carbon dioxide. Feedstocks can include animal manure, food waste and crops grown for that purpose. Maize is the most efficient, but grass silage is also good.  The National Non-Food Crops Centre has a calculator for comparing options. A small digester can take the feedstock of a single farm, running at moderate temperature and is cheap to set up. However, this is less efficient than a bigger plant, running hotter. Psychological ownership would be an issue: a group of farmers would take pride in their digester, but the neighbours of a commercial digester would be mainly aware of the smell and hazards. Biogas is probably the only energy source that is competitive with imported gas. Use of the waste heat to warm new houses a few hundred metres away (Combined Heat and Power) would further reduce costs.

Labour supporters need to acquire a view of state expenditure in relation to wealth generation, in our view. The shadow chancellor’s reference to the windfall from the 4G sale is somewhat irrelevant, as the £3 billion contents of this little purse would be long since swallowed by the debt repayment on the Public Sector Net Cash Requirement (PSNCR). The big increase in PSNCR following the loan to banks in 2008 is well-known. The reasons for the steady rise in public debt prior to 2008 are less well-known, but much of it is attributable to Tony Blair’s “education, education, education”. Without an additional source of government income, it was inevitable that the PSNCR would rise.  Some courses recoup their cost to the taxpayer through income tax. One example is the cost a three-year degree for a health profession. The cost to a foreign student is £35,000, but the fees of a UK student are paid by the NHS training authority. The cost of training a doctor starts at £65,000, but clinical placement increases the cost of training a GP to £344,700 (BMA press briefing). A GP earning £118,000 might pay about £40,000 a year in tax and take home a similar amount. This back-of-envelope calculation suggests that a doctor who stays in the UK to work as a GP might pay off in tax the cost of their training in about ten years.

The issue is therefore how the debt for building 100,000 houses might be repaid. The initial cost would be borne by public borrowing. The best value is when money is repaid within two years. While 10-year gilts attract 1.74%, two-year gilts currently attract only 0.2% interest. Despite the size of the public debt, pension funds continue to see UK gilts as safe havens for their (our) money. The income generated for the government from house-building/ power would be from corporation and income tax for a year or two, and rental income to the council or other owner once occupied. Power generation would give additional sales revenue, and this cheaper electricity would lower the cost of UK goods and services. Digesters create continuing employment, including some unskilled jobs in waste separation and movement.

A government-led programme favouring affordable housing and biogas might therefore have the biggest multiplier effect for public spending. Any borrowing would be repaid quickly by income tax, corporation tax, rental income, and electricity sales.

 

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