LONDON- Europe’s impoverished governments must increase public investment by up to 3 percent of their collective GDP annually in the coming years. Yet some politicians still think they can promise voters lower taxes. Since more debt and spending cuts won’t be enough to fund the economy’s future needs, fewer fiscal revenues now can mean slower growth later. Governments must choose between political expediency and economic realities. The latter suggest that higher taxes will be needed.
Political leaders in the European Union and the UK face a daunting task. They must invest in the green transition, boost defense spending to deal with new threats and help renovate telecom or railroad infrastructure. That’s before they turn to the business of boosting spending on healthcare to look after an ageing population.
The numbers are scary. Implementing the European Commission’s “Green Deal” will necessitate investments of some 600 billion euros a year until 2030. If governments fund about half that amount, with the other half coming from private investors, that will be about 1.7 percent of the region’s GDP. In the UK, a good yardstick is the opposition Labor Party’s pledge to spend an extra 28 billion pounds a year on the green transition. It has since rowed back on the promise, but it provides a rough idea of the British economy’s environmental needs — about 1 percent of GDP.
The EU and the UK also need to keep investing more in their military. Europe’s NATO members only reached last year the goal of spending 2 percent of GDP a year on defense they had originally agreed on in 2006. But that was only catching up with years of declining military spending. Some experts estimate that preparing for future threats means investing in defense another 1 percent of GDP, the equivalent of more than 240 billion euros a year when including the UK.
Infrastructure spending will add to the bill. Upgrading telecommunication networks alone would cost the public purse some 20 billion euros a year if governments fund just half of the program outlined by Brussels. In the UK, future governments will have to increase spending on essential works by at least 10 billion pounds a year, according to a National Infrastructure Commission report.
In all, these new investments would amount to 2.7 percent of the EU and UK’s combined GDP, according to Breakingviews calculations. That’s not counting the need to invest in education and training, to help workers deal with ongoing technological changes, and the increasing resources needed by the healthcare sector to cope with an ageing population. To meet all new public investment needs, 3 percent of GDP looks like a conservative estimate.
Governments have only three ways to finance this. They can borrow more. But some, such as France and Italy, already pay more in interest and principal repayments than on primary education or domestic security. Italy’s government gross debt should amount to 143 percent of the country’s GDP this year, according to the International Monetary Fund.
France’s is at 110 percent , and the UK’s at 106 percent . With yields on government bonds at multi-decade highs, more borrowing would test market confidence. Germany is the only major European power that could afford that path, with debt at only 64 percent of GDP after years of fiscal restraint and declining public investment. But it does not want to do so for deeply ingrained political reasons.
