Not all infrastructure is created equal

The real value of the projects we should be starting now will be measured over decades.

After three years of vigorous disagreement the political and economic commentariat seem to have found common ground. Infrastructure. Left and right now agree that it’s vital for the UK’s economic renewal, requires much greater infrastructure investment, and the Chancellor looks set to move it closer to the centre stage in the Budget.

Less has been said on what kind of infrastructure we need, and what its impact will be on the economy. The Treasury claim to like anything that is "shovel ready". This presents an image of kindly but determined, fluorescent jacketed men, forming a Roman column, as they wait for the signal to strike with their pick axes. In reality Whitehall struggles to find these projects because the most valuable infrastructure such as broadband upgrades or new energy schemes take years to prepare for investment,  don’t require direct taxpayer money, and are largely driven by the confidence of the  private sector.

The only infrastructure where government still has a direct lever to pull are those projects which receive direct taxpayer investment, such as road and rail schemes, which is why the Treasury is desperately nudging the transport department for schemes they can fund, even as the wallet is more firmly shut to other departments. Road proposals that the DfT have long since relegated to the recycling bin as bad investments have been fished out by Treasury ministers desperate to be seen to do something. According to some in DfT, these zombie roads could risk undermining the strategic role of the £37.5bn already announced to upgrade our rail network. We should remember that not all infrastructure compliments each other. Also, while road schemes are good at generating a short burst of employment as they are built, there is little longer last impact and they have a longer downside by making the economy more dependent on imported and volatile oil prices.

In contrast the majority of infrastructure projects set to be built without government money will increase the resilience of the UK economy to fuel price increases, and should increase the UK’s productivity. Work we have done at Green Alliance on the Treasury’s infrastructure pipeline shows that over two thirds of projects planned up to 2020 are low carbon, and 94 per cent of them require no direct government investment.  A "dash for gas" won’t be much help – it makes up 3 per cent of possible investment before the next election. Offshore wind makes up two thirds. This is the difference between good infrastructure that strengthens the UK economy, and bad which does not rebalance our economy and is too small to have a macro-economic impact.

The problem for all infrastructure advocates, amongst which I’m one, is that none of these major projects will have a significant impact by the time of the next election. Their real value must be measured over decades.

The best things to encourage in the short-term are measures that encourage individuals and businesses to invest and benefit in smaller chunks, like energy efficiency. The last government had some success in 2008 with its boiler scrappage scheme, which stimulated millions of pounds of home owner investment at very low public cost, but there are still several million more of the least efficient G rated boilers in UK homes, and a similar number without sufficient insulation. Measures to make better buildings and upgrade appliances may not fit the conventional description of infrastructure but they can have a much bigger economic benefit than pouring tarmac.

This is where Heseltine’s review had some interesting thoughts, at least on how infrastructure is decided. His focus on local powers and responsibilities seem likely to be agreed by the Chancellor. Granting currently quite weak Local Enterprise Partnerships the “authority or resource” they need could prove interesting for ensuring we deliver a more effective approach to deciding our infrastructure.

Agreeing to infrastructure investment is the beginning, not the end, of the discussion. Because not all infrastructure is created equal, you can expect the economic consensus about its value to end as soon as the picks hit the ground. But if we are serious about its role in economic renewal we should be having that debate now. And we should be choosing the low carbon energy and communications infrastructure that makes our economy ready for today’s challenges, not those of the last century.

A construction worker builds a high-speed rail bridge in Germany. Photograph: Getty Images

Alastair Harper is Head of Politics for Green Alliance UK

Getty
Show Hide image

Leader: The unresolved Eurozone crisis

The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving.

The eurozone crisis was never resolved. It was merely conveniently forgotten. The vote for Brexit, the terrible war in Syria and Donald Trump’s election as US president all distracted from the single currency’s woes. Yet its contradictions endure, a permanent threat to continental European stability and the future cohesion of the European Union.

The resignation of the Italian prime minister Matteo Renzi, following defeat in a constitutional referendum on 4 December, was the moment at which some believed that Europe would be overwhelmed. Among the champions of the No campaign were the anti-euro Five Star Movement (which has led in some recent opinion polls) and the separatist Lega Nord. Opponents of the EU, such as Nigel Farage, hailed the result as a rejection of the single currency.

An Italian exit, if not unthinkable, is far from inevitable, however. The No campaign comprised not only Eurosceptics but pro-Europeans such as the former prime minister Mario Monti and members of Mr Renzi’s liberal-centrist Democratic Party. Few voters treated the referendum as a judgement on the monetary union.

To achieve withdrawal from the euro, the populist Five Star Movement would need first to form a government (no easy task under Italy’s complex multiparty system), then amend the constitution to allow a public vote on Italy’s membership of the currency. Opinion polls continue to show a majority opposed to the return of the lira.

But Europe faces far more immediate dangers. Italy’s fragile banking system has been imperilled by the referendum result and the accompanying fall in investor confidence. In the absence of state aid, the Banca Monte dei Paschi di Siena, the world’s oldest bank, could soon face ruin. Italy’s national debt stands at 132 per cent of GDP, severely limiting its firepower, and its financial sector has amassed $360bn of bad loans. The risk is of a new financial crisis that spreads across the eurozone.

EU leaders’ record to date does not encourage optimism. Seven years after the Greek crisis began, the German government is continuing to advocate the failed path of austerity. On 4 December, Germany’s finance minister, Wolfgang Schäuble, declared that Greece must choose between unpopular “structural reforms” (a euphemism for austerity) or withdrawal from the euro. He insisted that debt relief “would not help” the immiserated country.

Yet the argument that austerity is unsustainable is now heard far beyond the Syriza government. The International Monetary Fund is among those that have demanded “unconditional” debt relief. Under the current bailout terms, Greece’s interest payments on its debt (roughly €330bn) will continually rise, consuming 60 per cent of its budget by 2060. The IMF has rightly proposed an extended repayment period and a fixed interest rate of 1.5 per cent. Faced with German intransigence, it is refusing to provide further funding.

Ever since the European Central Bank president, Mario Draghi, declared in 2012 that he was prepared to do “whatever it takes” to preserve the single currency, EU member states have relied on monetary policy to contain the crisis. This complacent approach could unravel. From the euro’s inception, economists have warned of the dangers of a monetary union that is unmatched by fiscal and political union. The UK, partly for these reasons, wisely rejected membership, but other states have been condemned to stagnation. As Felix Martin writes on page 15, “Italy today is worse off than it was not just in 2007, but in 1997. National output per head has stagnated for 20 years – an astonishing . . . statistic.”

Germany’s refusal to support demand (having benefited from a fixed exchange rate) undermined the principles of European solidarity and shared prosperity. German unemployment has fallen to 4.1 per cent, the lowest level since 1981, but joblessness is at 23.4 per cent in Greece, 19 per cent in Spain and 11.6 per cent in Italy. The youngest have suffered most. Youth unemployment is 46.5 per cent in Greece, 42.6 per cent in Spain and 36.4 per cent in Italy. No social model should tolerate such waste.

“If the euro fails, then Europe fails,” the German chancellor, Angela Merkel, has often asserted. Yet it does not follow that Europe will succeed if the euro survives. The continent that once aspired to be a rival superpower to the US is now a byword for decline, and ethnic nationalism and right-wing populism are thriving. In these circumstances, the surprise has been not voters’ intemperance, but their patience.

This article first appeared in the 08 December 2016 issue of the New Statesman, Brexit to Trump