The following comments from Con Keating endorse the argument of Ashok Gupta that Britain needs primary investment and not the replacement of existing capital by secondary investment. I am pleased to quote Con again, his work on New Towns is quoted by him here. You can read more on this blog from this link Con
Con argues that financing new towns through investment and not Government borrowing
Investment and Growth – Con Keating
Con Keating
We have heard much about investment and growth in recent days. This has tended to focus on the high levels of overseas investment of pension funds, an apparent absence of a ‘home bias’. In the private DB sector, this is a mischaracterisation: the problem there is excessive investment in gilts and other fixed income, to the exclusion of equity.
The first and most important point is that it is new investment which drives growth. This investment can primarily come from companies reinvesting their retained profits or from the flows of new savings institutions. It is also possible to fund new investment from the proceeds of existing investment sales.
Much emphasis has been placed on investment in the equity of UK companies, but much new corporate investment is financed with debt. Indeed, the proposal for New Town Development Agencies to issue bonds would be a classic example of growth inducing infrastructure investment.
Many believe that investment in existing UK listed equity would result in growth, but the purchase of equity in these markets as secondary transactions does not deliver any new funds to the corporate issuer. It is only primary offerings which achieve that, and even there, there is often a high degree of existing investors ‘cashing out’.
This lack of new investment extends to private investments, when purchased in secondary transactions; the purchase of a major stake in Thames Water by USS from Macquarie did not result in any new funds for Thames to deploy.
If there is to be any new investment in UK plc as a result of secondary market activity, it comes from the actions of the seller, and they have many possible competing uses for those funds, from consumption to overseas investment.
It is of course possible that secondary market purchases of listed equity have indirect effects on growth, through wealth and income effects; but these are significantly lower than direct investment effects.
Given competing demands for investment funds from public and private sector actors, a system of evaluating the implicit growth prospects of any particular investment is needed, and for that I would advocate the use of the fiscal multiplier.
If you aren’t aware of the “fiscal multiplier” this article may help.