Talk is cheap: why the gap between rhetoric and reality in the coalition’s infrastructure policy matters

Ministers should not be under any illusion that public spending on high carbon projects offers a quick economic fix.

Amid all the headlines about the biggest programme of road building for 40 years and announcements of new support for fracking, you would be forgiven for thinking that the recent Comprehensive Spending Review meant an abandonment of plans to decarbonise Britain’s economy. Thankfully, that’s not what our analysis of the Treasury’s own numbers shows as the plans for upgrading Britain’s infrastructure still remain focussed on public transport and renewable energy. However, there are major contradictions at the heart of the government’s policy, which risk deterring the very private sector investors who are needed to implement many of these projects.

There is a marked contrast between the government’s approaches to its fiscal and environmental responsibilities. They happen to be compatible principles but they need to be seen in perspective. Our children will care more about the state of the physical world they will occupy as adults than whether they inherit government debt of 80 rather than 90 per cent of GDP. Yet the government appears to focus all its visible efforts on the fiscal front, like a first world war general celebrating every tiny advance, irrespective of the huge sacrifices made. Meanwhile, on the environmental front, quiet progress has been made with decarbonising our energy system in recent years. Further huge strides can be made by pressing ahead with long standing plans for renewables and public transport.

There is also a contradiction in the promotion of private rather than public sector activities. When it comes to jobs, the government champions the ability of Britain’s private sector to create new jobs to offset those lost in the public sector and trusts in its ability to carry on doing this. Yet when it comes to infrastructure, it celebrates public spending on roads planned for the next parliament more than ongoing private investment in renewable energy.

The disconnection between rhetoric and reality can be seen clearly when you look at the plans for both public and private investment. The Comprehensive Spending Review heralded £20bn of public money for roads between 2015-2020, yet that is only about half of the planned spending on the railways of £38bn. The contrast for private sector investments in energy is even more striking. According to data gathered by the Treasury for its infrastructure pipeline, there are plans for around £10bn of gas related projects between 2015-2020. By contrast, there are plans for four times this investment in offshore wind, which could see an injection of £39bn by the private sector.

Some might think it doesn’t matter what politicians say, as long as the right plans are in place, but this overlooks the role of political leadership in shaping private sector expectations. As most of our low-carbon infrastructure will be delivered by the private sector, investor confidence is vital if these projects are to go ahead. However, confidence in the UK’s low carbon direction has fallen dramatically because of the perception that the coalition is divided on decarbonisation. As a result, investors have been delaying financial decisions, or expecting higher returns on their investments to cover risks. Indeed, the 50 per cent fall in new orders for infrastructure in the first quarter of this year serves as an early warning of the danger that the ambitious plans might not come to fruition.

This uncertainty is unnecessary and damaging. It comes at a time when Britain desperately needs sustained economic growth, supported by productive infrastructure that helps to rebalance the economy away from consumption.  This is the only way the government will be able to make good on its promise to restore the public finances.  The sheer scale of existing plans for low carbon infrastructure projects, means that they offer the fastest route to boosting growth. Conversely, cancelling these projects would leave a major hole in our investment plans and risk knocking us back into recession.

Some ministers have a tendency talk up high carbon infrastructure, perhaps hoping to protect themselves against criticism from climate sceptics or other opponents of renewable energy policy. But they should not be under any illusion that public spending on high carbon projects offers a quick economic fix. The government’s own numbers show the opposite as the majority of the UK’s infrastructure activity is clean and low carbon. Boasting about spending public money on roads, whilst sounding lukewarm on private investment in renewables, endangers both our economic recovery and our low-carbon future.

Julian Morgan is the chief economist for Green Alliance

George Osborne. Photograph: Getty Images
Photo: Getty Images
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There are risks as well as opportunities ahead for George Osborne

The Chancellor is in a tight spot, but expect his political wiles to be on full display, says Spencer Thompson.

The most significant fiscal event of this parliament will take place in late November, when the Chancellor presents the spending review setting out his plans for funding government departments over the next four years. This week, across Whitehall and up and down the country, ministers, lobbyists, advocacy groups and town halls are busily finalising their pitches ahead of Friday’s deadline for submissions to the review

It is difficult to overstate the challenge faced by the Chancellor. Under his current spending forecast and planned protections for the NHS, schools, defence and international aid spending, other areas of government will need to be cut by 16.4 per cent in real terms between 2015/16 and 2019/20. Focusing on services spending outside of protected areas, the cumulative cut will reach 26.5 per cent. Despite this, the Chancellor nonetheless has significant room for manoeuvre.

Firstly, under plans unveiled at the budget, the government intends to expand capital investment significantly in both 2018-19 and 2019-20. Over the last parliament capital spending was cut by around a quarter, but between now and 2019-20 it will grow by almost 20 per cent. How this growth in spending should be distributed across departments and between investment projects should be at the heart of the spending review.

In a paper published on Monday, we highlighted three urgent priorities for any additional capital spending: re-balancing transport investment away from London and the greater South East towards the North of England, a £2bn per year boost in public spending on housebuilding, and £1bn of extra investment per year in energy efficiency improvements for fuel-poor households.

Secondly, despite the tough fiscal environment, the Chancellor has the scope to fund a range of areas of policy in dire need of extra resources. These include social care, where rising costs at a time of falling resources are set to generate a severe funding squeeze for local government, 16-19 education, where many 6th-form and FE colleges are at risk of great financial difficulty, and funding a guaranteed paid job for young people in long-term unemployment. Our paper suggests a range of options for how to put these and other areas of policy on a sustainable funding footing.

There is a political angle to this as well. The Conservatives are keen to be seen as a party representing all working people, as shown by the "blue-collar Conservatism" agenda. In addition, the spending review offers the Conservative party the opportunity to return to ‘Compassionate Conservatism’ as a going concern.  If they are truly serious about being seen in this light, this should be reflected in a social investment agenda pursued through the spending review that promotes employment and secures a future for public services outside the NHS and schools.

This will come at a cost, however. In our paper, we show how the Chancellor could fund our package of proposed policies without increasing the pain on other areas of government, while remaining consistent with the government’s fiscal rules that require him to reach a surplus on overall government borrowing by 2019-20. We do not agree that the Government needs to reach a surplus in that year. But given this target wont be scrapped ahead of the spending review, we suggest that he should target a slightly lower surplus in 2019/20 of £7bn, with the deficit the year before being £2bn higher. In addition, we propose several revenue-raising measures in line with recent government tax policy that together would unlock an additional £5bn of resource for government departments.

Make no mistake, this will be a tough settlement for government departments and for public services. But the Chancellor does have a range of options open as he plans the upcoming spending review. Expect his reputation as a highly political Chancellor to be on full display.

Spencer Thompson is economic analyst at IPPR