Infrastructure spending & Economic Growth: A Briefing

Research

Infrastructure spending & Economic Growth: A Briefing

Ryan Bourne & Diego Zuluaga

8 November 2016

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IEA releases new briefing on infrastructure spending

https://iea.org.uk/wp-content/uploads/2016/11/IEA-Infrastructure-spending-briefing.pdf

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Executive Summary:

Chancellor Philip Hammond has been urged to increase government infrastructure spending to counteract any economic slowdown (demand management) and to improve the productive potential of the economy (supplyside reform).

Yet the ‘Keynesian’ function of infrastructure spending ignores the opportunity cost of such activity. Even if it worked theoretically, timing problems create challenges, whilst cutting spending in ‘good times’ is resisted.

Importantly, it’s impossible to argue there is a ‘demand-deficient’ high unemployment scenario in the UK now which requires new economic stimulus.

Good infrastructure can enhance the productive potential of the economy, but the political decision-making process often leads to bad decisions on spending, whether that is for electoral reasons or inefficiencies driven by a lack of market discipline.

For example, the 2010 Comprehensive Spending Review cancelled many strategic road schemes with benefitcost ratios above 3, but pressed ahead with the planned HS2 with a benefit-cost ratio slightly above 1. The costs of the latter HS2 scheme keep getting revised upwards.

There is little robust evidence of a systematic link between levels of government infrastructure spending and growth. In many ways, the government impedes the private-sector from delivering infrastructure.

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Ryan Bourne

Head of Public Policy and Director, Paragon Initiative

Ryan Bourne is Head of Public Policy at the IEA and Director of The Paragon Initiative. Ryan was educated at Magdalene College, Cambridge where he achieved a double-first in Economics at undergraduate level and later an MPhil qualification. Prior to joining the IEA, Ryan worked for a year at the economic consultancy firm Frontier Economics on competition and public policy issues. After leaving Frontier in 2010, Ryan joined the Centre for Policy Studies think tank in Westminster, first as an Economics Researcher and subsequently as Head of Economic Research. There, he was responsible for writing, editing and commissioning economic reports across a broad range of areas, as well as organisation of economic-themed events and roundtables. Ryan appears regularly in the national media, including writing for The Times, the Daily Telegraph, ConservativeHome and Spectator Coffee House, and appearing on broadcast, including BBC News, Newsnight, Sky News, Jeff Randall Live, Reuters and LBC radio. He is currently a weekly columnist for CityAM.

Diego Zuluaga

Policy Analyst at the Cato Institute's Center for Monetary and Financial Alternatives

Diego was educated at McGill University and Keble College, Oxford, from which he holds degrees in economics and finance. His policy interests are mainly in consumer finance and banking, capital markets regulation, and multi-sided markets. However, he has written on a range of economic issues including the taxation of capital income, the regulation of online platforms and the reform of electricity markets after Brexit. Diego’s articles have featured in UK and foreign outlets such as Newsweek, City AM, CapX and L’Opinion. He is also a frequent speaker on broadcast media and at public events, as well as a lecturer at the University of Buckingham.