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Off Track? Osborne’s Infrastructure Plan is too little too late.

Off Track? Osborne’s Infrastructure Plan is too little too late.

🕔03.Apr 2013
Curated from Birmingham Post – Business Blog, written by David Bailey

In his recent budget, Chancellor George Osborne unveiled yet another effort to boost infrastructure spending with a planned £3bn extra investment, but only from 2015-16, and with little detail on where that investment would actually go.

The extra money for infrastructure investment would come out of additional current spending cuts. The extra spending was welcome but fell far short of what was needed, and indeed what the Business, Innovation and Skills Secretary Vince Cable had called for before the budget.

There was no extra borrowing at historically low interest rates (as Vince Cable called for) to pay for extra capital spending to kick-start recovery. Cable, remember, had written that the question was whether “should borrow more, at current very low interest rates, in order to finance more capital spending: building of schools and colleges; small road and rail projects; more prudential borrowing by councils for house building. This last is crucial to reviving an area which led economic recovery in the 1930s but is now severely depressed”.

He went on to state that “such a programme would inject demand into the weakest sector of our economy – construction – and, at one remove, the manufacturing supply chain [cement, steel]. It would target two significant bottlenecks to growth: infrastructure and housing.”

In fact, Osborne’s move falls well short of what is needed (note that some experts estimate that the UK needs some £400bn of infrastructure investment over the next 10 years) and anyway previous Osborne budgets had promised much on infrastructure and had failed to deliver, so a large dose of scepticism is needed this time round as to whether the Chancellor will actually deliver.

Overall it was a disappointing budget in this sense. Far better would have been a willingness to borrow at historically low interest rates to kick start infrastructure spending and house building immediately. That could have been supported via a modestly funded national investment bank, with wider powers to leverage funding from the private sector to boost investment in infrastructure and housing.

We won’t know where the money will go until the summer at the earliest when we hear more in the Comprehensive Spending Review. But where should the money be spent?

From an economic point of view, the focus should be on “shovel-ready” projects which had previously been seen as delivering a return but which were axed in the first few years of the government. Dust them off, and get them moving.

The money is likely to go on big transport projects such as rail and road. And let’s not forget housing. Stimulating a housing price bubble via lending guarantees doesn’t make sense. Far better would be to actually spend money on building social housing via local authorities and housing associations.

Things anyway need to be speeded up urgently. A recent update on 40 projects under the so-called ‘National Infrastructure Programme’ showed that just two of the schemes were due for completion in 2013, with a number well behind schedule.

As a result Osborne has said that the government would create a central team of commercial specialists to oversee large scale projects. It’s a sign of how the government has so far failed to get projects moving.

What’s clear is that HS2 isn’t going to help much in getting the economy moving soon as it is years off. ‘Shovel ready’ projects are what we need, and given the scale of capital spending cuts by the government in the first few years, there should be plenty available of viable projects to choose from.

And apparently the government is looking at a second motorway toll road. I’m wondering why they are bothering. Why come up with a no-doubt hugely complicated scheme to sell assets or rights to build roads and charge tolls to sovereign wealth funds and infrastructure multinationals when it would be far cheaper for the government to just borrow the money by issuing government bonds (gilts) at historically rock-bottom rates?

Osborne doesn’t want to do this because like with PFI, he wants to keep this off the government’s balance sheet, so as to keep reported borrowing and debt figures down. But also like early PFI schemes in particular, this often ends up costing a lot more than simple bond financing in the long run, and just like any other debt will have to be repaid ‘on the never-never’ over decades.

Furthermore, the limited experience with road charging in the UK isn’t exactly encouraging. As I’ve noted before (see here), the financial problems with the M6 Toll don’t bode well for private sector investment in roads, which is something the government is trying to encourage.

Professor David Bailey works at Coventry University Business School

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