Lewis Goodall discusses recent research by IPPR North regarding the government’s stated aim of rebalancing the economy, finding that the rhetoric does not match the reality. The next national infrastructure plan must focus on targeting spending to promote growth across the country and not just in parts of it.
“Without a rebalanced economy we will never have sustainable public finances or a prosperous economy.” George Osborne’s words echo an oft-repeated government ambition: to rebalance the economy, from overreliance on one preeminent sector (finance) and from one dominant region (the Greater South East.) This is a laudable aim – without both, the British economy will never earn its living in a hyper-competitive world marketplace. For a prosperous future, all sectors and regions of the UK must be firing on all cylinders.
It was therefore disappointing that in the spending priorities outlined in the Autumn Statement, the Chancellor failed to make the hard choices needed to spur that rebalancing. He acknowledged the important role capital investment has in creating growth. He announced £30 billion of spending in a new National Infrastructure Plan; including an immediate increase of £5 billion over the next five years taken from underspend elsewhere and with plans for a further £5 billion in the following five years. The immediate boost to aggregate demand, however, will be small, with the spread in proposed spending lasting more than a decade. For a more immediate effect, more projects would need to be frontloaded.
As well as driving economic growth, the Chancellor’s infrastructure announcements were intended to shape the nature of economic growth and ‘promote growth across regions and nations.’ IPPR North has analysed the data detailing the projects to be brought forward as part of the national infrastructure pipeline. Behind the rhetoric, our analysis reveals that there is precious little in the way of ‘rebalancing’ government investment:
- Eleven of the twenty largest infrastructure projects benefit London and the South East. Five of the top twenty benefit the North of England.
- If London and the South East are considered together they account for 84 per cent of planned spending as compared to just 6 per cent in the North of England (including just 0.04 per cent in the North East).
- This equates to £2,731 per head for Londoners, more than for all of the other regions combined, compared to £201 per head in Yorkshire and the Humber, £134 per head in the North West and just £5 per head in the North East.
- For each £1,000 of gross value added (GVA) generated in 2009, £81 is being spent on transport projects in London, £38 in the South East, £12 in Yorkshire, £8 in the North West and less than 50p in the North East.
- Eighteen major transport projects have already started in London and the South East, compared to one in the North West, three in Yorkshire and the Humber and none in the North East, meaning any short-term boost to the economy is likely to be concentrated in the South East.
- None of the top twenty regional projects will benefit the North East, East Midlands or South West.
It is desperately important that we invest in regions beyond the Greater South East. OECD analysis on regional economic development shows that so-called ‘lagging regions’ – including all three regions of the North – play a critical role in enhancing national economic growth. In the UK, lagging regions contributed 57 per cent of net aggregate growth between 1995 and 2007. The OECD identifies two key areas for driving growth in lagging regions: increasing the skill level of the population and investing in infrastructure. So, while the government’s focus on infrastructure spending is important, a greater proportion of its investment needs to be channelled to lagging regions for the UK economy to excel.
There are both political and technical reasons for these imbalances. Governments of both colours have directed huge resources into London and the South East for political gain. But HM Treasury’s Green Book – the manual by which investment decisions are appraised – and the accompanying New Approach to Appraisal (NATA) for transport projects are also culpable, as they are heavily in favour of those areas with the highest population density. As a result, projects in London and the South East always compare favourably in cost-benefit comparisons with other places.
As London’s transport infrastructure and economy improves, so does its population density. As a result, the process becomes self-fulfilling to the point where it is difficult to see when London’s congestion effects will finally be identified as a disbenefit rather than a good reason to invest yet more. Put crudely, it is our contention that London and the South East are locked into a dependency on public sector spending on infrastructure which masks the true costs of doing business in the capital and holds back growth opportunities for other cities in their hinterlands.
Thankfully, all is not entirely lost. Many of the projects set out in the National Infrastructure Plan rely on funding which will come within the next spending review period. While there is benefit in having a medium to long term plan for infrastructure spending, there is clearly a further opportunity for the existing plan to be reconfigured and for a more genuine rebalancing to take place.
For this reason we advocate the following measures:
- Ahead of the 2014 spending review, the government should review all post-2014 major transport infrastructure projects.
- NATA guidelines should be revised to reduce the emphasis on ‘transport user benefits’ in favour of the wider economic productivity effects of transport investments and the social and distributional effects of major schemes.
- Government should devolve a significant proportion of post-2014 infrastructure funding to consortia of local enterprise partnerships or integrated transport authorities who can bring forward integrated proposals for infrastructure improvements that will drive sub-national economic growth.
Ultimately, our economic recovery depends on regions outside the Greater South East. If the next national infrastructure plan is to be as it just that – national – then the Chancellor must ensure that spending generates growth across the nation, and not just in parts of it.
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About the author
Lewis Goodall – IPPR North
Lewis Goodall is a Researcher at IPPR North, IPPR’s dedicated think tank for the North of England. He has also worked in the American Congress and the British Parliament.