From the TUC

The Government’s ‘£30bn investment plan” – reasons to be cautious

28 Nov 2011, by Guest in Economics

The Chancellor looks set to announce a ‘£30bn boost to infrastructure’ at his Autumn Statement.

Whilst any measures aimed at increasing demand are obviously to be welcomed I worry that today’s headlines are running a little ahead of reality.

Increasing investment will be crucial to Britain’s recovery – more investment not only provides a much needed boost to domestic demand in the short run, it also helps the economy to grow faster in the future. Because of this the TUC’s ten point plan for growth released today includes measures such as raising capital allowances to encourage firms to invest, reversing the cut in the feed-in tariff for solar power and protecting the science budget.

As the TUC’s Economic Report set out recently :

Despite a bounce back in the second quarter, business investment remains depressed.  It remains over 20% below its pre-recession levels.

And this actually understates the problem – British investment levels before the crisis were lower than our international peers.

Given this – why I am somewhat suspicious of the ‘£30bn infrastructure boost’ story?

The devil, as ever, is in the details.

The concrete announcement is that government capital spending will be increased by £5bn. But this will be paid for by cuts in other current
spending. (This sounds very like an idea floated around the time of Lib Dem conference back in September).

The first problem with this is that funding this £5bn by less spending elsewhere will immediately offset some of the extra demand created.

The second problem is that £5bn isn’t, in the grand scheme of the economy, a huge amount of money.  The most recent figures show (ONS chart below) that public sector net
investment is currently down 40% compared to the year below.

Between April and November this year the government’s net investment has amounted to £10bn, down from £16.4bn in the same period in 2010. In other words a £5bn boost wouldn’t even take us back to where we were last year.

And even this £5bn isn’t immediate. The BBC reports that:

About £5bn will be provided in the next two to three years, and a further £25bn allocated in the long-term, Mr Alexander said

Whilst the schemes to get pension funds investing in the real economy are clearly very welcome, we still lack details on structures and timings and, given the current economic and financial climate, serious questions can be asked as to how much of this will actually appear.

So, looking below the headlines the “£30bn infrastructure boost” very quickly becomes a “£5bn infrastructure boost over the next two or three years with an another £25bn to follow, hopefully”. This doesn’t even offset the government’s own squeeze on investment, let alone provide a major short term boost.

4 Responses to The Government’s ‘£30bn investment plan” – reasons to be cautious

  1. Leigh Caldwell
    Nov 28th 2011, 10:55 am

    Of course there are not enough details to figure out exactly how this will work, but I’m hoping that the involvement of private money will mean that the investment happens ahead of the public spending (otherwise why bother involving pension funds at all).

    I imagine it will be a PFI scheme (presumably under a different name) so that the commitment to £30bn of future revenue spend will unlock, say, £25bn of immediate capital investment. This would be compatible with the figures as announced, though leaves open the question of why they would announce it in such a weak-sounding, watered-down manner instead of being a bit bolder. If what they actually mean is that the future revenue commitments signed in the next 3 years will only be enough to unlock £5bn of investment, that would be very disappointing.

  2. Duncan Weldon

    Duncan Weldon
    Nov 28th 2011, 11:44 am

    Leigh,

    I very much hope you’re right. Although I worry they have oversold this in order to generate good headlines.

    Guess we’ll find out tomorrow!

    D

  3. Paul
    Nov 28th 2011, 3:25 pm

    Leigh

    I don’t get the impression it’s PFI anyway near where we knew it I think it’s more likely to be an extension of the existing Regulatory Asset Base model used in utlities. The National Infrastructure Plan refers to a review of how it might work in other capital investment settings, though the review has never been done, and the Treasury Select Committee recommended consultation on this and Local Asset Base Vehicles in July 2011. Jesse Norman tweeted me to confirm that what follows from 01 December is a consultation phase on this.

    Of course it all raises questions, especially about how the tab is drive through to the consumer, and the necessary regulation involved, than answers.

    Hence the vagueness. Pity, as they’ve had a long while to sort this out now, and no spend is going to happen soon.

  4. jonathan
    Nov 29th 2011, 2:52 am

    There is odd, interesting subtext in the short news bit. For example, unless one assumes a high multiplier – and an immediate one at that – for this spending, then why bother or at least why bother now? The announcement implies they can identify spending that has a lower multiplier or whose draw down matches the time line of infrastructure spending … and that implies the identified spending is infrastructure spending too so the whole thing becomes circular.

    They appear to assume a high multiplier for some government spending and not for other government spending though small c conservative principles say that can’t be so because Keynesianism is so damned wrong. (In the US, this belief appears not to hold true for military spending because, heaven knows, we can’t have enough of that and it “creates jobs”.)

    One could also have the interesting effect of cutting spending that directly supports immediate demand while spending on projects to increase demand in the future. I wonder then if the future growth curve related to this spending is lowered by some of the decreased current demand.