The challenge of Infrastructure Investment in Britain

Chapter in "Delivering a 21st Century Infrastructure for Britain" co-authored with Ben Caldecott and James Wardlaw. Published by Policy Exchange.

The British economy at the end of the first decade of the 21st century is not in good shape. The credit crunch and subsequent recession have revealed deep structural weaknesses.The state of the public finances is widely agreed to be unsustainable and additional spending in the cause of a Keynesian stimulus has added to the debt. Consumer spending, which had been based on rising house prices and increased consumer borrowing, has fallen sharply, and both consumers and industry are trying to reduce their debt levels. The bursting of the Brown boom and the painful recognition that the business cycle has not been
abolished have been accompanied by two further reality checks. First, North Sea oil and gas are substantially depleted: Britain now has to switch back to energy imports and sterling no longer has a petro-currency status.The sharp devaluation has reinforced the second setback: the City of London is unlikely to play such a large part as the golden goose for the economy and the Treasury as it has since financial liberalisation.

In this much colder financial climate, numerous proposals and economic plans have been put forward, many involving very substantial deficit spending in an attempt to boost consumption by increasing public borrowing yet further.As part of this debate some have suggested that spending on infrastructure and green investment should play a part.

Encouraging infrastructure investment has many advantages over attempts to boost consumption.The key difference from a macroeconomic perspective is that it creates assets to offset against the borrowing, while at the same time contributing to aggregate demand. But it has an additional and, arguably, more important role: it addresses the productivity and competitiveness of the British economy by improving the energy, transport, communications and water systems that make a substantial contribution to the costs of consumers and businesses. The state of these network infrastructures is generally considered poor; few would choose to locate in Britain because of its infrastructure. Much of it needs renewal or replacement. It is also increasingly overtaken by technological progress and the new environmental constraints. Britain’s infrastructure is not fit for the digital age and much of it is very carbon-intensive. Broadband is providing direct access to information technologies, but it is also revolutionising the more traditional networks. Energy networks can now be "smart”, as can metering. Even water can be provided in much more intelligent ways and waste management is open to a host of technological innovations. Analysis and wider public debate tend to focus on the needs of individual industries, with little focus on aggregating the total required infrastructure spend
or on the common problems in all sectors. The reason that the aggregate matters is not only because it turns out to be enormous, but that it needs to be set in the wider macroeconomic context. Spending on infrastructure rather than consumption may be preferable, but, as with the consumption boost, it too needs to be financed. Infrastructure spending on the scale set out in this report raises the question as to whether that finance will be forthcoming, especially when governments everywhere are tapping the bond markets for unprecedented sums.

The aims of this section are to set the infrastructure requirements in this macroeconomic context; to explain why infrastructure matters; to provide some
crude estimates of the enormous scale of the spend in the coming decade that has already been indicated by government and regulators; and to explain how it can be financed, notably through the development of the regulatory regime. The section therefore provides an integration of the immediate needs to address the economic crisis with a longer-term way to re-equip the British economy, in the aftermath of the North Sea windfall and on the assumption that the economy will need to restructure somewhat from the overwhelming dependency on financial services.

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