It’s time for a new take on infrastructure spending – but not the one Westminster picked
14 January 2020
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14 January 2020
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The British public should be wary of the recent fad of lavish infrastructure spending as often they are little more than political enticements with flimsy economic foundations.
Throughout the 2019 election, parties across the political spectrum have announced ambitious spending programs in a bid to garner support, especially in regions hurt by austerity. Infrastructure has become the epicentre of these programmes. Chancellor Sajid Javid announced a total of £13 billion for better transport in the north whilst his Labour counterpart John McDonnell suggested £55 billion per annum for the same region.
Indeed, following the election result, these promises have become even more crucial for the Johnson government. Voters in northern constituency once part as Labour’s ‘Red Wall’ will expect strong investment into their infrastructure.
Whilst there is a strong argument in favour of the regenerative effects of infrastructure investment in an underperforming region’s economy, such funds must be spent in a sensible and reasoned manner in order to achieve its goals. The proposed spending plan suggests previous programmes have not effectively operated in this manner.
Instead of poorly managing these vast sums, the new Conservative government should equip local government with greater authority over infrastructure projects whilst simultaneously allowing the private sector to raise and spend funds on such schemes.
Examples of central government infrastructure spending based on political decisions with disappointing effects are abundant. In 2015, South Thanet, Farage’s chosen constituency, received £12 million for high-speed rail links. Other such projects are still being paid off by taxpayers, notably Wilson’s Humber Bridge, with half of the £300 million debt still outstanding, providing little justification for the expense in regional growth dividend.
Both the Labour Party and Conservatives assured the public that any deficit increases would be modest and not hurt voter’s pockets. However, the Conservative government’s intention for the government deficit to stay at 3% is higher than the previous Labour government’s 2.8%, which Sajid Javid had previously described as having ‘left this country with an economic crisis’.
When one recognises that the Chancellor’s claim of his £22 billion total spending increase lying within the existing fiscal headroom (approximately £15 billion) does not line up with reality, it becomes obvious that the precision required to effectively budget large projects may well be lacking in the Treasury.
Given the sums being handled, such budgetary clumsiness provides a strong argument against central government managing such projects.
But if, as is the case, the proposed target regions are in desperate need of investment to meet their potential and the residents fully aware of the fact, then a coordinated upgrade of infrastructure must come from somewhere. The obvious alternatives to central government are local administrations, whose understanding of the needs and ability to effectively micromanage projects is much greater than Westminster’s, and the private sector.
Deciding upon infrastructure projects is an acute challenge for national governments. As outlined by the Institute for Government, there is no overarching government strategy outlining the future vision for UK infrastructure, nor an overall governing vision to clarify how infrastructure investment should be approached and prioritised. Road construction is an excellent example of such government failure. Traffic has increased by 80% between 1980 and 2005 whilst road capacity has increased only by 10%. The average benefit-cost ratio of proposed road construction projects that were cancelled is 3.2, a value which would have expected to deliver a positive net value to the economy.
The private sector can judge success based on return on investment in a manner incredibly difficult for the government to do. Central government should avoid lavish infrastructure spending plans and rely upon the private sector’s ability to generate economic growth and prosperity.
Sweeping tax reforms to place fiscal policy in the hands of local government, increases in the flexibility regional powers have to set local regulations and the prompting of a wider cultural change for greater local responsibility for redevelopment will provide local politicians with the ability to make their regions competitive, thus drawing in investment and economic activity.
Local and regional authorities can tailor infrastructure projects to meet the needs of local communities in a manner central governments struggle with. Devolving infrastructure projects is already an established argument. In September 2019, the Royal Town Planning Institute (RTPI) published a report that called on government to devolved such powers to avoid planning confusion and miscommunication. When one considers the complexity of the multiple levels of governance involved in infrastructure projects, the RTPI’s suggestions do not seem unreasonable.
Achieving a decentralised infrastructure system will require fiscal spending and raising powers to be controlled by county councils and unitary authorities. A localised fiscal system ensures that local knowledge is effectively utilised by politicians in establishing the best form of public goods and services. Such reforms may well include re-localisation of business rates, a reform of the existing local council tax and even a devolved income tax. Localised fiscal systems has proven to be a success abroad, notably Finland, where local government is predominantly funded through a local income tax which represents 39% of total local revenues. Blöchliger has previously established that fiscal decentralisation is associated with a higher national income and higher levels of investment. The London Finance Commission (2013) and Commission on Local Government Finance (2015) have both proposed reforms to enhance the spending powers of local authorities and achieve the benefits set out by Blöchliger.
Further still, the power to plan such infrastructure projects and enact them will require the reversal of a number of keystone legislative pieces, such as the 1947 Towns and Country Planning Act. Acts that properly establish the devolution of infrastructure planning powers must also be implemented, learning from the shortcomings of the 2011 Localism Act and continuing on the effects of the 2016 Cities and Local Government Devolution Act. A combination of effective powers to local authorities (as far down as parishes and district councils) and local authorities managing their own finances will effectively tackle the infrastructure issues caused by central government, create a more competitive country, and ultimately, provide local communities with the infrastructure that they require.
The UK’s new government has a choice. It may either throw more money at regions, effectively continuing its track record of politicised funds with little economic benefits. Alternatively, it can take a new approach, one based on local responsibility over infrastructure and greater flexibility of funding. Through such an approach, infrastructure projects can be tailored to provide what communities truly need rather than what politicians believe will help themselves.
Throughout the 2019 election, parties across the political spectrum have announced ambitious spending programs in a bid to garner support, especially in regions hurt by austerity. Infrastructure has become the epicentre of these programmes. Chancellor Sajid Javid announced a total of £13 billion for better transport in the north whilst his Labour counterpart John McDonnell suggested £55 billion per annum for the same region.
Indeed, following the election result, these promises have become even more crucial for the Johnson government. Voters in northern constituency once part as Labour’s ‘Red Wall’ will expect strong investment into their infrastructure.
Whilst there is a strong argument in favour of the regenerative effects of infrastructure investment in an underperforming region’s economy, such funds must be spent in a sensible and reasoned manner in order to achieve its goals. The proposed spending plan suggests previous programmes have not effectively operated in this manner.
Instead of poorly managing these vast sums, the new Conservative government should equip local government with greater authority over infrastructure projects whilst simultaneously allowing the private sector to raise and spend funds on such schemes.
Examples of central government infrastructure spending based on political decisions with disappointing effects are abundant. In 2015, South Thanet, Farage’s chosen constituency, received £12 million for high-speed rail links. Other such projects are still being paid off by taxpayers, notably Wilson’s Humber Bridge, with half of the £300 million debt still outstanding, providing little justification for the expense in regional growth dividend.
Both the Labour Party and Conservatives assured the public that any deficit increases would be modest and not hurt voter’s pockets. However, the Conservative government’s intention for the government deficit to stay at 3% is higher than the previous Labour government’s 2.8%, which Sajid Javid had previously described as having ‘left this country with an economic crisis’.
When one recognises that the Chancellor’s claim of his £22 billion total spending increase lying within the existing fiscal headroom (approximately £15 billion) does not line up with reality, it becomes obvious that the precision required to effectively budget large projects may well be lacking in the Treasury.
Given the sums being handled, such budgetary clumsiness provides a strong argument against central government managing such projects.
But if, as is the case, the proposed target regions are in desperate need of investment to meet their potential and the residents fully aware of the fact, then a coordinated upgrade of infrastructure must come from somewhere. The obvious alternatives to central government are local administrations, whose understanding of the needs and ability to effectively micromanage projects is much greater than Westminster’s, and the private sector.
Deciding upon infrastructure projects is an acute challenge for national governments. As outlined by the Institute for Government, there is no overarching government strategy outlining the future vision for UK infrastructure, nor an overall governing vision to clarify how infrastructure investment should be approached and prioritised. Road construction is an excellent example of such government failure. Traffic has increased by 80% between 1980 and 2005 whilst road capacity has increased only by 10%. The average benefit-cost ratio of proposed road construction projects that were cancelled is 3.2, a value which would have expected to deliver a positive net value to the economy.
The private sector can judge success based on return on investment in a manner incredibly difficult for the government to do. Central government should avoid lavish infrastructure spending plans and rely upon the private sector’s ability to generate economic growth and prosperity.
Sweeping tax reforms to place fiscal policy in the hands of local government, increases in the flexibility regional powers have to set local regulations and the prompting of a wider cultural change for greater local responsibility for redevelopment will provide local politicians with the ability to make their regions competitive, thus drawing in investment and economic activity.
Local and regional authorities can tailor infrastructure projects to meet the needs of local communities in a manner central governments struggle with. Devolving infrastructure projects is already an established argument. In September 2019, the Royal Town Planning Institute (RTPI) published a report that called on government to devolved such powers to avoid planning confusion and miscommunication. When one considers the complexity of the multiple levels of governance involved in infrastructure projects, the RTPI’s suggestions do not seem unreasonable.
Achieving a decentralised infrastructure system will require fiscal spending and raising powers to be controlled by county councils and unitary authorities. A localised fiscal system ensures that local knowledge is effectively utilised by politicians in establishing the best form of public goods and services. Such reforms may well include re-localisation of business rates, a reform of the existing local council tax and even a devolved income tax. Localised fiscal systems has proven to be a success abroad, notably Finland, where local government is predominantly funded through a local income tax which represents 39% of total local revenues. Blöchliger has previously established that fiscal decentralisation is associated with a higher national income and higher levels of investment. The London Finance Commission (2013) and Commission on Local Government Finance (2015) have both proposed reforms to enhance the spending powers of local authorities and achieve the benefits set out by Blöchliger.
Further still, the power to plan such infrastructure projects and enact them will require the reversal of a number of keystone legislative pieces, such as the 1947 Towns and Country Planning Act. Acts that properly establish the devolution of infrastructure planning powers must also be implemented, learning from the shortcomings of the 2011 Localism Act and continuing on the effects of the 2016 Cities and Local Government Devolution Act. A combination of effective powers to local authorities (as far down as parishes and district councils) and local authorities managing their own finances will effectively tackle the infrastructure issues caused by central government, create a more competitive country, and ultimately, provide local communities with the infrastructure that they require.
The UK’s new government has a choice. It may either throw more money at regions, effectively continuing its track record of politicised funds with little economic benefits. Alternatively, it can take a new approach, one based on local responsibility over infrastructure and greater flexibility of funding. Through such an approach, infrastructure projects can be tailored to provide what communities truly need rather than what politicians believe will help themselves.
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