Infrastructure spending: good for politicians, bad for Britain
Matthew Lynn Aug 28, 2012
It certainly sounds impressive. A massive barrage across the Severn Estuary would capture tidal power and turn it into electricity. It could generate 5% of Britain’s power needs – and in a way that was environmentally friendly. Last weekend there were reports that the prime minister, David Cameron, had asked ministers to examine the scheme’s feasibility. The government needs something that looks like a growth strategy, and it needs it fast. Infrastructure fits the bill.
With the downturn stretching into its fifth year, and looking more like a depression, it is no surprise that the government is grasping for big building projects to kick-start an economy that seems permanently stuck in first gear – with a constant risk of slipping into reverse. The Severn Barrage is one of several mega-projects that may be given the go-ahead soon. A new London airport is also on the cards. So is a high-speed rail line from London to Manchester.
The trouble is, none of them will do the trick. A lack of infrastructure isn’t holding us back. Britain isn’t growing because it has deep structural problems built up during 15 years of mis-management. A few building projects may create some jobs – but not any lasting wealth.
The Barrage? That would cost £30bn – no small sum for a nation up to its eyeballs in debt – but would also create 20,000 jobs. It would generate a lot of cheap power. And it would allow the government to boast about its green credentials.
The high-speed rail line? That would cost £32bn for the first leg, and a lot more if it eventually makes it all the way to Scotland. It would also upset a lot of people as it ploughs its way through the Buckinghamshire countryside. But it would whisk us to Birmingham in less time than it takes to say ‘Ozzy Osbourne’. In addition it would create a vast number of jobs as the tracks were laid.
And an airport? Boris Johnson’s vision of a new hub in the Thames Estuary would create an offshore terminal to rival Hong Kong’s. It would serve long-haul flights, with integrated high-speed rail links into London and over to Europe. It would cost £50bn – but think of the benefits.
No doubt there are plenty of other projects that could be dreamt up. A motorway to Cornwall would be handy, especially in August. Some massive wind farms off the Norfolk coast could harvest a lot of electricity. A new generation of nuclear power stations would also be useful.
Lead indicators for Britain's economy
The appeal for politicians is obvious. They get to announce a big project, and it looks like they are kick-starting the economy as they generate a lot of jobs very quickly. As the Olympics showed, if you spend a ton of money to build things, you need lots of blokes in yellow hats. It injects demand into the economy – but it does not create any real wealth.
There is no evidence that Britain suffers from poor infrastructure. We just staged the Olympics, the world’s greatest spectacle, and our transport system coped perfectly well. If you want to make travelling to Birmingham or Manchester easier, more trains with cheaper prices and free wi-fi would promote rail travel more effectively than spending £40bn on a new line.
If the Severn Barrage is such a great investment then why can’t it be funded by the private sector? In a world of zero-interest rates and dodgy sovereign debt, investors are desperate to invest in big, safe infrastructure projects that pay a steady return. If it can generate returns of 7% or more a year, there should not be any problem raising the capital. If it can’t, then we shouldn’t be doing it.
The real problem isn’t infrastructure, it’s that our debt levels are higher than in any other country, except Japan, and still getting worse. State spending has hit 50% of GDP – a level at which our abysmal public-sector productivity strangles the growth of the whole economy. Our central bank has copied the Bank of Japan in printing money – even though Japan has spent 15 years going nowhere. We have also lost control of inflation and our currency is perpetually weak. These are serious problems that need fixing before Britain can grow again.
Last time the British economy was in serious trouble we spent plenty on technology and infrastructure. We created Concorde, then discovered no one wanted it. We built the Channel Tunnel, and then watched as it ran into a financial crisis. There was a huge campaign to electrify the railways. None of that led to the economic revival of the 1980s and 1990s.
What made a difference was hard-headed structural reform. We tackled militant trade unions, cut taxes, curbed inflation, privatised state monopolies and deregulated whole industries. Eventually that led to far higher growth.
The same will be true this time around. Spending vast sums on new infrastructure might be a useful short-term boost, but it will add to our debts. Just as in the 1980s, only structural reform will boost the economy. At best, infrastructure spending won’t make any difference. It might actually make things worse.
FREE - MoneyWeek's daily investment email
Our free daily email, Money Morning, is an informative and enjoyable analysis of what's going on in the markets. Written by our Editor, John Stepek, and guest contributors.
Sign up FREE to Money Morning here.