UK: Infrastructure’s Doing OK, But We Need More Houses

The government is on the back foot over its fiscal strategy again, partly because of its curious approach to policy.

George Osborne, having railed against the unfunded tax cuts proposed by Labour, managed to come up with one himself, postponing the 3p a litre fuel duty rise planned for August 1 until January.

The cost, £550m, will apparently be met through savings in spending by government departments, though the Treasury says it will take until the autumn statement to work out what they will be.

Osborne’s announcement, on the day poor public finance figures were revealed, may have merit in itself, as did the u-turns on the pasty tax, caravans, skips (yes) and tax relief on charitable donations.

They create an impression, however, of a chancellor who bends under relatively modest pressure. Is the cut in the 50p rate safe? What about the “granny tax”, another controversial element of the budget?

Would we be entirely shocked if, one say, Osborne was to stand up and say that in the light of events he had decided to suspend his deficit reduction programme? The Treasury insists these u-turns are minor adjustments and the big picture remains resolutely intact. But it makes you wonder.

The significance of the latest numbers for the public finances was not only the disappointing May figures. which showed borrowing of £17.9 billion, nearly £3 billion up on a year ago.

No, it was the trend over the past few years. The Office for National Statistics now thinks public sector net borrowing, the government’s preferred budget deficit measure, peaked at £158.6 billion in 2009-10, falling to £140.6 billion in 2010-11 and £127.6 billion for the fiscal year recently ended, 2011-12.

The 2011-12 figure was disappointing, representing an upward revision of more than £3 billion, but remained consistent with what looks like a successful deficit reduction strategy.

Except that the detail is rather less encouraging. The current budget deficit is important in this context. This represents the recurring elements of government spending – public sector pay, pensions and benefits, and so on – less current receipts, the majority of tax revenues.

The current budget deficit, adjusted for the economic cycle, is what the government aims to eliminate. Progress, however, is painfully slow.

From its peak of £110 billion in 2009-10, this deficit only fell to £99.5 billion a year in 2011-12. At a £5 billion a year pace of reduction you do not need a calculator to work out that it will take 20 years to eliminate it.

Why is the overall deficit down more than £30 billion since 2009-10, while the current deficit is a mere £10 billion lower? The answer is that the coalition persisted with the reductions in capital spending – on schools, hospitals, roads, and so on – it inherited from the Labour government.

So net investment by the public sector fell from £48.5 billion in 2009-10 to £28 billion in 2011-12. Take away that reduction and you barely have any drop in the overall budget deficit. Other things being equal, the deficit would be stuck at close to levels the coalition inherited two years ago, and the AAA rating would be long gone.

That is one reason why, despite ultra low gilt yields, the government resists calls to boost capital spending. Reductions in net investment have driven deficit reduction.

The task gets harder from now on because deficit reduction will have to be through reducing current spending and hoping for higher tax revenues. It would be greatly complicated if, at the same time, capital spending was being increased.

There is another reason. Listen to the debate on the British economy and you could be forgiven for thinking that, so sapped is business confidence if the government does not invest, nobody will.

That is not true in general. Business investment in the first quarter was up by 14.8%, in real terms, on a year earlier. Firms may be downbeat but they are spending.

It is also not true of infrastructure spending. The national infrastructure plan, updated at the end of last year, set the numbers out. Over the period 2005-10, £113 billion was spent on the infrastructure.

From 2011 to what it described as “2015 and beyond”, £250 billion of such spending is planned. There are a couple of caveats. There is many a slip between plans and delivery and “and beyond” offers a get-out.

To check, I contacted the Construction Products Association (CPA). In some of the key areas of infrastructure spending, there is indeed a boom, according to Nobel Francis, the CPA’s economics director. Spending on rail is on course for a 57% rise by 2014, and is exceeding spending on roads for the first time in many decades.

There is also high spending on water and sewerage and, in particular, energy, where electricity investment will treble by 2016. So it is plausible that, far from being starved of infrastructure investment, the economy is experiencing something like a doubling compared with 2005-10.

Could more be done? Spending on roads is falling. The £550m fuel duty postponement could have been used to fill potholes. It would have generated more jobs and, I suspect, kept motorists happier, though still have been unfunded.

There is, as discussed here many times, undoubted weakness in housebuilding. Most of the solution lies with the private sector, and restoring mortgage funding. It remains to be seen if the Treasury-Bank “funding for lending” scheme will do it.

There may also be a bigger role for the public sector. Whether you call it council housing or social housing, building now is less than 10% of its 1967 peak. We are not going to see a return to the building of the 1960s, but more could be done. The chancellor has pledged to use what he described as the strength of the government’s balance sheet to support infrastructure.

One way is to offer enhanced guarantees on bonds for building issued by housing associations, Another, suggested by the IPPR (Institute for Public Policy Research) in a new report, Together At Home, would be for the government to follow the practice of other countries, exempting local authority housing funding – which has a stream of rental income to offset its cost – from its deficit measures.

There is, as I say, a lot of infrastructure spending going on. The public finance numbers suggest the government could not afford a conventional boost in capital spending. But there is scope for the use of guarantees and other devices to bring forward more spending, on housing and on roads. We may hear more about this soon.

My regular column is available to subscribers on This is an excerpt.

This post originally appeared at David Smith’s EconomicsUK and is posted with permission.