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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is the chair and chief executive of BlackRock
When the G7 met in Puglia recently, the seven countries around the table accounted for 61 per cent of the planet’s public debt, 45 per cent of its GDP and 11 per cent of its workforce. The economic future of the world’s major democracies depends on decreasing the first number, increasing the second, and making the third — the G7’s relatively small labour force — more productive. The infrastructure sector may be able to accomplish all three.
The US, UK and their allies are staring down the same growth dilemma. Debt burdens have become so large that traditional fiscal policies can no longer tame them. By 2030, what the US government must pay out (mandatory spending plus net interest on debt) will permanently exceed what it takes in (tax revenue). Even if discretionary spending went to 0, the country would still run a deficit. That projection is based on current law. But even if laws change, it’s hard to see a scenario where spending cuts or tax increases are sufficient to solve the debt crisis. That’s true for most G7 nations.
The only way out is growth — increasing the size of our economies so that what we owe is small relative to what we make. The problem is that growth is getting much harder to find.
An economy’s growth ceiling is set, in part, by the size of its labour force, and four G7 nations have already seen working-age populations start to decline. If immigration trends hold, both the US and the UK will join them. By 2065, Canada will be the only G7 nation not on a demographic downslope.
Infrastructure investment can be a counterforce to a high-debt, low-growth economy. It does the opposite — catalysing growth without necessarily adding public debt. Why? There’s a rapidly growing pool of private dollars to pay for infrastructure (more on that in a moment) and a wide body of literature shows that, in general, every dollar invested in infrastructure produces well over a dollar in additional economic output. From 1950 to 1989, roughly 25 per cent of the American productivity increase was attributable to increased investment in the highway system.
This growth can be felt very quickly. For example, the construction of new data centres for AI is causing US energy demand to grow after 15 years of stagnation. In addition, the technology will also make people more efficient, meaning our smaller future workforce can still become more productive than our larger current one.
But building this infrastructure requires a resource in short supply: pragmatism.
First, we need pragmatism in financing. By 2040, the world will need to spend $75tn repairing old and building new infrastructure. Asking taxpayers to shoulder $75tn of new debt is not something countries can reasonably do.
The capital markets aren’t always a good alternative to public financing, but they are in this case. The current supply of private investment for infrastructure is $1tn, and BlackRock projects this is going to be one of the fastest growing segments of the capital markets.
Second, we need pragmatism in policy — specifically, in permitting. When President Biden signed the Inflation Reduction Act two years ago, the law’s clean energy investments were projected to reduce carbon emissions by 710mn metric tons (MMT) by 2030. But if permitting delays continue, the new projection is 475 MMT.
In both the US and the EU, permitting for the average infrastructure project takes longer than building it. An extra high-voltage power line requires up to 13 years before it’s permitted. China takes no more than 3.5 years to deploy the same project. That should change.
Finally, we need pragmatism in energy. Much of the new infrastructure is for renewables. But without advances in storage, wind and solar cannot provide a reliable flow of electricity. The world can’t function without it. For now, it’s estimated that more than half of data centres’ electricity has to come from dispatchable sources like nuclear or natural gas. Otherwise, these bedrocks of the digital economy will shut down.
During conversations at the G7, very few disagreed with these goals. Who’s against more economic growth? The hard part is what happens after leaders leave the room — turning the desire for growth into a strategy for it.
Fortunately, in this case, our growth strategy can start with a very simple chain of logic. We can grow by building infrastructure. We can build infrastructure by unlocking private investment. We can unlock private investment by being smart about policy. The world’s great democracies have historically also been its great economic powers. With a measure of pragmatism, I believe they can stay that way.