Infrastructure report: Extending the role of the state

Like money burning a hole in one’s pocket, historically low interest rates have opened the lock on the Treasury’s coffers. Even though the coronavirus emergency is eclipsing everything else, Boris Johnson promised an “infrastructure revolution” in the election and Rishi Sunak will borrow a lot of money to deliver it. In his first budget the Chancellor of the Exchequer allocated an extra £84bn to departmental capital budgets over five years. By 2022-3 the additional investment will be running at around £20bn a year. But spending more is not enough. A guiding strategy is needed and that is lacking.

The headline totals may in any case turn out to be less impressive because governments find it difficult in practice to ramp up spending on capital projects in a hurry. The independent Office for Budget Responsibility, whose economic and fiscal forecasts underpinned the Budget, reckons on past experience that actual investment will fall short of the planned increases by a fifth. Its fiscal projections anticipate an extra £67bn over five years, with the additional investment running at around £16bn a year from 2022-3.

Another reality check is that some boost to infrastructure was necessary simply to compensate for losing access to the European Investment Bank (EIB) through leaving the EU. In the five years before the referendum in 2016, the EIB financed infrastructure projects such as offshore wind farms in Britain worth 29bn euros (£24bn at the then exchange rate).

But what matters more than the precise figures is the use to which the extra money will be put. The government has outlined various specific projects—some small, such as a new fund worth £2.5bn over five years to fill potholes, some big, such as “the fastest and largest increase” ever in publicly-supported R&D, which will raise it to £22bn in 2024-5. A comprehensive allocation of funding will come in the spending review in July. What is missing as yet is an overarching strategy for what the extra investment is seeking to achieve and how its economic and social objectives will be consistent with environmental goals.

Such a strategy would also need to recognise that transforming Britain’s infrastructure is not just a matter of raising public investment. The privatisations of the 1980s and 1990s shifted responsibility for energy, water and telecoms out of the public sector. Local authorities now build council homes in the low thousands, whereas until the end of the 1970s they built them in the hundreds of thousands. The government’s role in improving Britain’s infrastructure is as much to conduct the orchestra as to play the music.

A straightforward use for the extra public money is to rectify past neglect in parts of the national estate for which the government is wholly responsible, notably the NHS. One reason to worry about Britain’s capacity to cope with the coronavirus pandemic is that it has so few hospital beds per person compared with other health systems in Europe. The NHS is also less well equipped with vital diagnostic kit, such as MRI and CT scanners (see Anita Charlesworth for more).

The state also needs to intervene where the private sector fails to deliver. Nowhere is that more apparent than in housing. The most effective way to tackle the chronic shortage of affordable homes is for the state to provide more of them, whether directly through councils building new homes or indirectly through increased funding for housing associations. The extra £9.5bn that Sunak found for the affordable homes programme—taking the amount the government will spend on it over five years to £12.2bn, bringing in another £38bn of mainly private investment—is a step in the right direction.

"Investing in infrastructure can improve productivity—the main engine of GDP growth in the long run"

There is also a strong argument that investing in economic infrastructure such as transport can improve productivity, the main engine of GDP growth in the long run. That’s urgently needed after a lost decade in which productivity gains have been negligible. Under the former chancellor Philip Hammond, the government had already committed to spending a lot more on strategic roads over the next few years, with big new projects including the Lower Thames Crossing and upgrading the A66, which crosses the Pennines, to a dual carriageway. Digital networks matter, too. Sunak announced £5bn to support the rollout of broadband to areas of the country that are hardest to reach.

What about Johnson’s politically inspired plan to “level up” the lagging regions of central and northern England through an infrastructure bonanza? Anyone thinking that there is some inherent magic in big transport projects in the north should consider the fate of the underused Humber Bridge. Built to honour a promise made in early 1966 to help Harold Wilson’s Labour government win a vital by-election in Hull, it never made any economic sense.

Transport investment per person is undoubtedly much lower in the midlands and north of England than in London. There is a case for scaling up spending through the planned east-west northern powerhouse rail link and improved commuting services. A determined effort to boost skills in the north may be just as important. Encouragingly, the chancellor has set aside £1.8bn (of which £1.5bn is in England) over five years to refurbish further-education colleges.

Beyond economic, social and regional objectives, an infrastructure strategy must have at its heart a long-term plan for both adapting to and tackling climate change. Only that will breathe life into Johnson’s manifesto pledge to make Britain a net zero economy by 2050. Quite simply there is little point in rushing to build new homes or hospitals that will be environmentally obsolescent within 30 years. Following the recent legal judgment blocking Heathrow expansion, the government will in any case need to demonstrate that its policy for big projects takes into account the pledges it made under the 2015 Paris agreement.

Since global warming is already triggering more extreme weather events, adaptation is increasingly urgent. As this winter’s storms once again demonstrated, one effect is flooding. The government announced a doubling in spending on defences, to £5.2bn over six years. That is welcome but what matters is whether the extra funding is used as part of a coherent plan to tackle flooding, which should encompass the release of land for housebuilding since far too many new houses are being constructed on flood plains.

As well as being hit by more storms, Britain is also having to cope with increasingly hot summers. This calls for further adaptation, such as extra investments in the water industry to cope with prolonged droughts. But though adaptation is essential, the overriding priority must be to launch Britain on an achievable path towards a net zero economy by 2050.

One priority will be to generate all power free of carbon emissions, through renewables and nuclear. According to the Committee on Climate Change, this could require renewable generation of 75GW of offshore wind, compared with 10GW currently. This is a prime example of new infrastructure that will be the private sector’s responsibility to build and finance. The government’s role is to ensure a regulatory framework that will induce such investment while also ensuring continuity of supply, given our increasing dependence on naturally fluctuating wind and solar sources.

The shift to clean power will in turn enable the reduction and eventual elimination of carbon emissions by cars and vans, as electric (or hydrogen) vehicles replace the existing fleet. Once again, the government’s main role is to orchestrate this change, for example through the deadline for banning new sales of petrol, diesel or hybrid models, which following an announcement in February is due to be 2035 at the latest. There will also have to be a revolution in the way that homes are heated, phasing out natural gas as well as enhancing their energy efficiency.

As well as masterminding this shift towards a net zero economy, the state must pioneer new technologies that can help. Carbon Capture and Storage (CCS) will be a further essential component of a net zero policy. Sunak has made a start with a plan to invest at least £800m to establish CCS, starting with one site by the mid-2020s, but there is still much more to do.

Britain does need to transform its infrastructure, above all to prepare for a green economy. The state’s role in bringing that about goes beyond pushing up public investment. If the government is to deliver the genuine infrastructure revolution that Britain needs it must set out a long-term plan with clear staging posts for what the private as well as the public sector must do. Otherwise there is a danger that a policy born of opportunism to exploit low interest rates will lack staying power, degenerating into a familiar boom and bust cycle in public investment.