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To fix the economy fix infrastructure, don't fund flagship projects Fix infrastructure, don't fund flagship projects
(about 14 hours later)
Knives are being sharpened. Lips are being licked. George Osborne's political enemies can barely wait for the release of the growth figures for the final three months of 2012, which are due out in little more than a fortnight's time.Knives are being sharpened. Lips are being licked. George Osborne's political enemies can barely wait for the release of the growth figures for the final three months of 2012, which are due out in little more than a fortnight's time.
If the economy contracted again, unflattering comparisons will be drawn between Britain and America. On the other side of the pond, it will be said, things are looking up thanks to Washington's determination to put recovery before fiscal discipline. In poor old Blighty we are suffering from the government's insistence on putting the cart before the horse.If the economy contracted again, unflattering comparisons will be drawn between Britain and America. On the other side of the pond, it will be said, things are looking up thanks to Washington's determination to put recovery before fiscal discipline. In poor old Blighty we are suffering from the government's insistence on putting the cart before the horse.
This is something of a caricature, of course. Fiscal policy – anything to do with tax and public spending – has been tightened in the US over the past couple of years as the impact of Barack Obama's stimulus has faded, and there will be further tightening in 2013 despite the New Year's Eve deal that backed the US away from the edge of the fiscal cliff.This is something of a caricature, of course. Fiscal policy – anything to do with tax and public spending – has been tightened in the US over the past couple of years as the impact of Barack Obama's stimulus has faded, and there will be further tightening in 2013 despite the New Year's Eve deal that backed the US away from the edge of the fiscal cliff.
But there is enough truth in the comparison to make it politically potent. The Americans have not made deficit reduction the judge and jury of economic policy, preferring to make a lower unemployment rate the measure of success.But there is enough truth in the comparison to make it politically potent. The Americans have not made deficit reduction the judge and jury of economic policy, preferring to make a lower unemployment rate the measure of success.
Whereas the coalition here took the axe to infrastructure projects on coming to office in 2010, Obama hailed the $780bn (£485bn) stimulus in the American Recovery and Reinvestment Act as the means both to boost the economy and rebuild a creaking infrastructure.Whereas the coalition here took the axe to infrastructure projects on coming to office in 2010, Obama hailed the $780bn (£485bn) stimulus in the American Recovery and Reinvestment Act as the means both to boost the economy and rebuild a creaking infrastructure.
The US recovery is nothing to write home about by historical standards, but the economy is in better shape than is the case in Britain, where output is still 4% below its pre-recession peak in 2008.The US recovery is nothing to write home about by historical standards, but the economy is in better shape than is the case in Britain, where output is still 4% below its pre-recession peak in 2008.
There are lessons to be learned from the American experience. The first is that public infrastructure stimulus can help underpin the economy when the private sector is retrenching. The second is that this can be achieved even when money is tight, by switching resources from current to capital spending.There are lessons to be learned from the American experience. The first is that public infrastructure stimulus can help underpin the economy when the private sector is retrenching. The second is that this can be achieved even when money is tight, by switching resources from current to capital spending.
Osborne announced in his autumn statement that £5bn in savings from departmental spending would be re-cycled into higher capital spending: it's as close as he will come publicly to admitting that the deep infrastructure cuts in 2010 were a mistake.Osborne announced in his autumn statement that £5bn in savings from departmental spending would be re-cycled into higher capital spending: it's as close as he will come publicly to admitting that the deep infrastructure cuts in 2010 were a mistake.
Liberal Democrats in the coalition want the chancellor to go further in the March budget, taking advantage of rock-bottom interest rates to borrow for growth-generating investment projects.Liberal Democrats in the coalition want the chancellor to go further in the March budget, taking advantage of rock-bottom interest rates to borrow for growth-generating investment projects.
The Treasury favours a different approach. It would prefer to see the private sector playing a bigger role in road building, and Osborne is not short of suggestions as to how he could create the revenue streams that would get investors interested. These include government guarantees, shadow tolls, private-public partnerships and the hypothecation of vehicle excise duty to fund road building.The Treasury favours a different approach. It would prefer to see the private sector playing a bigger role in road building, and Osborne is not short of suggestions as to how he could create the revenue streams that would get investors interested. These include government guarantees, shadow tolls, private-public partnerships and the hypothecation of vehicle excise duty to fund road building.
But work by the Campaign for Better Transport suggests this approach is seriously flawed. Toll roads are not bringing in projected revenues and are politically toxic. Shadow toll schemes, where motorists are not charged for using roads, but the government hands over an annual sum to firms contracted to build and maintain public roads, have proved bad value for money for taxpayers.But work by the Campaign for Better Transport suggests this approach is seriously flawed. Toll roads are not bringing in projected revenues and are politically toxic. Shadow toll schemes, where motorists are not charged for using roads, but the government hands over an annual sum to firms contracted to build and maintain public roads, have proved bad value for money for taxpayers.
To take one example, the Campaign for Better Transport says that past experience suggests the cost to the taxpayer of a shadow toll scheme for the proposed A14 scheme in Cambridgeshire would be in excess of £5bn, at least £3bn more than if it were funded by public borrowing at a notional rate of 4%.To take one example, the Campaign for Better Transport says that past experience suggests the cost to the taxpayer of a shadow toll scheme for the proposed A14 scheme in Cambridgeshire would be in excess of £5bn, at least £3bn more than if it were funded by public borrowing at a notional rate of 4%.
Some projects are, of course, being bankrolled by the state. Osborne announced plans in the 2012 autumn statement to upgrade the A1M and the M25, to link the A5 to the M1 in Bedfordshire, and to dual the A30 in Cornwall.Some projects are, of course, being bankrolled by the state. Osborne announced plans in the 2012 autumn statement to upgrade the A1M and the M25, to link the A5 to the M1 in Bedfordshire, and to dual the A30 in Cornwall.
The Northern line in London is to be extended to Battersea power station, and an announcement on the extension of High Speed Rail 2 (HSR2) to the north-west and Yorkshire and Humberside, is supposed to be imminent.The Northern line in London is to be extended to Battersea power station, and an announcement on the extension of High Speed Rail 2 (HSR2) to the north-west and Yorkshire and Humberside, is supposed to be imminent.
This, though, does not add up to a coherent plan. There are two big drawbacks: the first is that Britain needs the boost from infrastructure now and it will take years before work starts on these big projects. The second is value for money: the experience from both the US and the UK is that a make do and mend approach, fixing things that need repair, is a better use of public funds than new construction.This, though, does not add up to a coherent plan. There are two big drawbacks: the first is that Britain needs the boost from infrastructure now and it will take years before work starts on these big projects. The second is value for money: the experience from both the US and the UK is that a make do and mend approach, fixing things that need repair, is a better use of public funds than new construction.
Analysis of how the Obama stimulus was spent provides the third lesson for Britain. A study from a body called Smart Growth America found that too many states did not use the money in ways that would have provided the greatest number of short-term and long-term jobs.Analysis of how the Obama stimulus was spent provides the third lesson for Britain. A study from a body called Smart Growth America found that too many states did not use the money in ways that would have provided the greatest number of short-term and long-term jobs.
The study cited 2009 research by the University of Utah, which found that public transportation, and road and bridge repairs, produced more jobs. Public transport investments generated 31% more jobs per dollar than building roads and bridges, and repair work on roads and bridges generated 16% more jobs per dollar than new construction in that field.The study cited 2009 research by the University of Utah, which found that public transportation, and road and bridge repairs, produced more jobs. Public transport investments generated 31% more jobs per dollar than building roads and bridges, and repair work on roads and bridges generated 16% more jobs per dollar than new construction in that field.
"Repair and maintenance projects spend money faster and create jobs more quickly than building new. Repair and maintenance projects are open to more kinds of workers, spend less on equipment and more on wages, and spend less time on plans and permits. New capacity projects also require more funding for buying property, which has little stimulative or reinvestment value."Repair and maintenance projects spend money faster and create jobs more quickly than building new. Repair and maintenance projects are open to more kinds of workers, spend less on equipment and more on wages, and spend less time on plans and permits. New capacity projects also require more funding for buying property, which has little stimulative or reinvestment value.
"Fixing infrastructure produces a higher return on investment than new construction because repair prevents the need for reconstruction later, which costs four to 14 times as much.""Fixing infrastructure produces a higher return on investment than new construction because repair prevents the need for reconstruction later, which costs four to 14 times as much."
What is true of the US is true of Britain. The Department for Transport has compared the value for money and the environmental benefits of various schemes. It looked at three bridge and overpass repairs, in Leeds, Portsmouth and Solihull, and three new road projects in Devon, Norwich and East Sussex. The former offered by far the best deal to the taxpayer and accounted for the lowest carbon emissions.What is true of the US is true of Britain. The Department for Transport has compared the value for money and the environmental benefits of various schemes. It looked at three bridge and overpass repairs, in Leeds, Portsmouth and Solihull, and three new road projects in Devon, Norwich and East Sussex. The former offered by far the best deal to the taxpayer and accounted for the lowest carbon emissions.
Yet Britain has always been a sucker for the big prestige project that turns out to be either a colossal white elephant or so massively expensive that it crowds out more productive spending.Yet Britain has always been a sucker for the big prestige project that turns out to be either a colossal white elephant or so massively expensive that it crowds out more productive spending.
Concorde was an example of the former. HSR2 has the hallmarks of being one of the latter. No doubt spending the thick end of £30bn on a new railway line would create jobs: but the question is whether that sum would be better spent on local improvements to rail networks, repairs to bridges and potholes being filled in.Concorde was an example of the former. HSR2 has the hallmarks of being one of the latter. No doubt spending the thick end of £30bn on a new railway line would create jobs: but the question is whether that sum would be better spent on local improvements to rail networks, repairs to bridges and potholes being filled in.
So why don't we spend the money more effectively? Two reasons. First there is the lobbying from the big construction companies and their trade union, the CBI. Second, the belief that glamour projects are more politically acceptable than expenditure on smaller, local, schemes.So why don't we spend the money more effectively? Two reasons. First there is the lobbying from the big construction companies and their trade union, the CBI. Second, the belief that glamour projects are more politically acceptable than expenditure on smaller, local, schemes.
This seems a questionable assumption. My guess is that filling in potholes, repairing bridges, developing local public transport and improving commuter rail services, would win more votes than road building and HSR2. And would be better for the economy too.This seems a questionable assumption. My guess is that filling in potholes, repairing bridges, developing local public transport and improving commuter rail services, would win more votes than road building and HSR2. And would be better for the economy too.