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