With Chinese investment looking shaky after Hinkley Point, pension funds failing to deliver and PFI out of the picture, there’s a very good case for government debt-funded economic stimulus, says Chris Hallam.
Chris Hallam
The government’s unexpected eleventh-hour decision to pull back on approving the new nuclear power station at Hinkley Point in Somerset has added further uncertainty to an already uncertain construction sector still reeling from the Brexit vote and with little clarity as to how to fund the £483bn worth of projects identified in the National Infrastructure Delivery Plan.
The truth is that, amid all this uncertainty, there has probably never been a better time for government to invest in the UK’s crumbling and decrepit infrastructure. According to the World Economic Forum, the UK ranks a lowly 24th in the world for the overall quality of its infrastructure – well behind most of our European partners and the likes of Jamaica, the Philippines and Oman.
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We spend around 2% of GDP on infrastructure – way below the 3.5% for developed economies recommended by the Organisation for Economic Co-operation and Development (OECD), and have an accumulated infrastructure deficit somewhere north of £400bn.
High returns on spending
Of course this is not new: over the last 30 years the one thing we have been consistently good at in the UK is woefully under-investing in our infrastructure. That said, the plus side of this – such that it is – is that the UK benefits from a disproportionately high return when we do increase infrastructure spending.
Last year Standard & Poor’s reported that the UK would experience greater economic benefit from increased public spending on infrastructure than any other major world economy except Brazil. It found that an increase in infrastructure spending of 1% of GDP would generate a 2.5% increase in GDP over a three-year period – double the impact of a similar increase in Germany or France.
Similar research by the Civil Engineering Contractors Association (CECA) recently concluded that each new job created in infrastructure construction resulted in three jobs for the wider economy, and that in the long term every £1 invested raises economic activity by £2.84. The economic multiplier effect from construction is about the best of any economic sector.
Add to this the fact that long-term borrowing rates for the government are the lowest they have ever been or are likely to be, and it’s hard not to conclude that it makes no real sense to continue to run an austerity-based cost-cutting economy at a time when money is so cheap and when traditional means of funding infrastructure, such as PFI, are essentially defunct.
"Things have moved on and PFI is now the political equivalent of Monty Python’s parrot – if it’s not already dead it’s certainly in a near-comatose."
PFI (with its rebranded younger sibling, PF2) is the Tory creation that became the darling of Tony Blair’s Labour government. Whatever your view of its rights and wrongs, it can’t be denied it succeeded in pumping hundreds of billions of pounds of private sector investment into schools, hospitals, prisons, roads and social infrastructure – investment which would almost certainly not have happened without it.
Of course, things have moved on and PFI is now the political equivalent of Monty Python’s parrot – If it’s not already dead it’s certainly in a near-comatose state of rest and there is little prospect of using it in any substantial way to fund our current and future infrastructure needs.
The tens of billions of investment from pension funds so eagerly promised by George Osborne early in his tenure as chancellor amounted to a mere trickle of a few hundred million – and most of that was into existing infrastructure. Investment from China – as much as £105bn over the next decade – was to be the next big thing, but after Brexit and the Hinkley announcement, Beijing could be forgiven for reconsidering its options.
Cross-party political support
The case for an economic stimulus in the form of government debt-funded infrastructure investment is a strong one – something that hasn’t gone unnoticed around the corridors of Westminster. Leadership contenders of all political persuasions have floated the idea of an infrastructure splurge to boost the economy – although sadly none of them are likely to be in a position to do anything about it. However, at least they’re talking about it and a bit more noise from the industry might keep it on the political agenda.
Opponents may argue that for investment to be effective we need “shovel-ready projects”. It’s unlikely that expansion at Heathrow or Gatwick would create much of a stimulus in the short term, even if the government made a decision tomorrow.
However, that’s not to say we don’t have any shovel-ready projects. Hinkley Point is the most high profile, but there are plenty of others: road repairs, housing maintenance and, perhaps the greatest need of all, new housing. HS2 too could be sped up with a more ambitious construction programme – perhaps starting from both ends rather than from south to north.
Hopefully, our new prime minister has the courage to reverse some of the economic policies of her predecessor and invest in the infrastructure the country desperately needs – and in doing so create the wider economic growth needed to push our way out of an increasingly likely-looking downturn.
Chris Hallam is a partner at international law firm Nabarro LLP and heads its Infrastructure, Construction & Energy practice in Manchester
