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Ian Brinkley
Economic Advisor
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Ian Brinkley

Why wait to invest?

Authors: Ian Brinkley Ian Brinkley

27 June 2013

The government’s infrastructure statement issued this morning sets out some impressive numbers and ambitions for investing in Britain’s infrastructure. As ever, the experts will need days, weeks, and possibly months to work out exactly what is new and what is a re-announcement of existing plans. They will also need to work out how much is additional compared with what the government would have spent anyway and which spending looks a clear commitment and which seems to be less certain.

It is helpful to have these ambitions set out over the longer term, although the statement is still incomplete. The big outstanding decision that has yet to be revealed is whether or not to go ahead with a third runway at Heathrow.
What is striking about the statement however is the disconnect between what is actually happening to public investment in the short term and the plans laid out for the years beyond. According to yesterday’s Spending Round statement, there will be a real terms fall in public sector gross investment of just under 2% comparing 2014-15 and 2015-2016. The government will struggle to entirely dispel the scepticism from some businesses and others that good intentions are not being translated into additional investment.

The statement sets out some cogent arguments for the economic and social value of the planned investment from 2016-2017 onwards. However, it is not clear why these arguments are not just as valid today. Earlier start dates for the big long-term commitments and bringing forward some “shovel ready” projects could have significant economic and social benefits – and save on future bills.

Investment in energy supply and major new rail investment are of necessity long-term commitments. Even if a third runway eventually wins formal approval, it would take some time even to start construction yet alone complete the project. But there appears to be no practical reason why investment in areas such as road maintenance or social housing could not be brought forward as “shovel ready” projects.

The infrastructure plan suggests that between 2015-2016 and 2020-2021 nearly £6 billion will be invested by local authorities in road maintenance. Bringing a significant share of this cash through to the start of 2014-2015 would help create much needed jobs in construction and related industries. It could also save bills in the future. When roads start to deteriorate, it is usually much more cost-effective to tackle them as soon as possible rather than wait and watch them deteriorate even more and face a bigger bill in the future.

Moreover, it has never been cheaper to borrow for investment projects today – whereas by 2016-2017 we can expect the cost of borrowing to be higher as interest rates start to move towards more “normal” levels.
The argument against is presumably the need to sustain financial discipline in the face of the international markets in order to keep borrowing costs low. However, the markets are much less likely to react to an increase in capital investment that helps support and sustain economic growth projects than they would, say, to increased spending on social benefits. And even better, of course, if higher investment now could be part of a co-ordinated response across the European Union.