If, like me, you travel into Wales from England on the M4 often, you will be using a great piece of infrastructure. The Prince of Wales Bridge, formerly the second Severn crossing, is a tribute to the best of British design and civil engineering.
It is also an excellent example of how to do infrastructure. The first Severn crossing, the Severn Bridge, was mooted just after the Second World War and finally given the go-ahead in the early 1960s and opened in 1966. It cut journey times significantly and benefited the economy on both sides of the Severn, most notably in South Wales.
But, and this was the clever bit, it was soon recognised that the bridge would run into capacity problems and a second crossing would be needed. That was good planning. Work commenced on the second bridge in the early 1990s, and it was opened in 1996.
The second bridge was financed, built and operated by a consortium, which also took on responsibility for the first bridge, including its debt, and for both bridges received the income from tolls for a 30-year period. That ended in 2018, since which time both bridges have been publicly owned and toll-free. The second Severn crossing was renamed the Prince of Wales Bridge, generating some controversy.
The economies on both sides of the Severn will continue to receive the benefits of this good infrastructure planning and delivery for years to come. Many will know, though, that some of those benefits have been reduced by bad infrastructure planning; the failure to re-route the M4 in South Wales, which currently trundles at a crawl, with frequent stop-starts, through Newport and the outskirts of Cardiff.
The essential point is that infrastructure decisions made many decades ago continue to deliver economic benefits now, just as we benefit from the infrastructure decisions made by our Victorian forefathers.
And this, in a nutshell, was the point made in a discussion paper a few days ago by the Office for Budget Responsibility (OBR), the government’s economic and fiscal watchdog. The paper, Public Investment and Potential Output, is technical, but its central message is clear.
“In our initial … analysis, we find that a sustained 1 per cent of gross domestic product (GDP) increase in public investment could plausibly increase the level of potential output by just under ½ a percent after five years and around 2½ per cent in the long run (50 years),” the OBR says. The economic benefits of infrastructure investment take years to come through, but when they do so they are significant.
Why the delay? Announcements take time to get through planning, something Labour has pledged to fix, and projects do not deliver supply-side benefits during the construction phase, though they boost employment and economic activity.
These findings are significant. They show that the current five-year horizon for the public finance and fiscal rules is too short to capture the benefits of increasing infrastructure spending. Whether that explains the UK’s public investment record or whether it is because of cost overruns and project delays, where this country compares badly with its peers, can be debated.
It is not just the fiscal rules that have too short a time horizon. Politicians are driven by policies that will deliver quick and tangible results, not ones which have slow-release benefits over decades, even centuries.
The history of public investment in the UK is decidedly patchy. Governments can never decide whether public investment is a priority or something to be cut when the going gets tough, which loses fewer votes than hiking taxes or cutting other spending.
Public sector net investment peaked at 8 per cent of GDP in the 1960s, when there were many more nationalised industries included in the investment figures and housing investment by government in the form of council houses operated at a large scale. It then fell back sharply over the next three decades, to 0.5 per cent or less in some years in the 1990s.
• Labour urged to inject £27bn to kick-start growth
A recovery to 3 per cent of GDP by 2008 was not sustained, falling victim to the post-crisis austerity of David Cameron and George Osborne in the 2010s, and averaging less than 2 per cent of GDP.
In 2020, when Rishi Sunak became chancellor, the then government planned and promised to invest “more than £600 billion in our future prosperity” lifting “public net investment in real terms to the highest since 1955”. But, the OBR notes, these ambitions were thwarted by “the disruptions of the pandemic and energy crises [which] brought about another period of planned retrenchment”.
The latest forecast from the OBR is for a fall in public sector net investment from 2.5 per cent of GDP in 2023-24 to 1.75 per cent in 2028-29. The epitaph for the Tories’ infrastructure ambitions was when Sunak went to the Tory conference in October last year in Manchester and announced the scrapping of the northern leg of HS2. Potholes were a bigger political priority.
Will Labour be any different, or will we see more of the same from a government which has made no secret of the fact that it is strapped for cash? Even before the election, Rachel Reeves, the chancellor, forced the drastic scaling back of the party’s promised £28 billion a year green investment plan.
Many hopes are pinned on the new National Wealth Fund, with £7.3 billion of funding initially allocated through the UK Infrastructure Bank. The idea of the fund is to “crowd in” private investment, including long-term finance from pension funds and insurance companies, which makes sense.
Mark Carney, the former Bank of England governor, a member of the wealth fund taskforce, says: “The new government has rightly identified infrastructure investment as a core enabler of building high value, low carbon, competitive industries. The smart use of public investment via the National Wealth Fund can kick start economic growth.”
The question is whether the fund will operate at sufficient scale, and whether it can overcome the barriers of the past, which include the fact that, all too often, politicians find that they have more pressing short-term priorities.