Sunday, August 25, 2019
Scrapping HS2 would derail Javid's infrastructure plan
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on www.thesundaytimes.co.uk This is an excerpt.

Sajid Javid is a man with a plan, and he is not keeping it secret. The chancellor may only have been in office for a month, but a month can be a very long time in politics, and he has already made clear when asked that his ambition is to undertake a big increase in infrastructure spending, irrespective of the Brexit outcome.

During the Tory leadership contest he talked of creating a £100bn national infrastructure fund, probably to be spent over five years and, while he did not win that contest, he has taken that ambition to the Treasury with him.

Nor is this a sudden burst of thinking from Javid. When he was communities’ secretary two years ago he argued for a £50bn fund for housing and housing infrastructure, to deliver on the government’s pledge of 300,000 new homes a year but was rebuffed by Theresa May and Philip Hammond.

The logic is compelling. Britain badly needs more infrastructure spending, nationally and in the left-behind regions, for transport, energy, new technologies such as electric vehicles, social housing, broadband and so on. The days when the UK could attract foreign direct investment on the basis of a flexible workforce, low taxes and membership of the single market, in spite of poor infrastructure, are on the way out. In future we will need better infrastructure.

From an economic perspective, it is also compelling. The excitement over the so-called inversion of the yield curve this month has provided a reminder of just how low yields, or market interest rates, are on government bonds, gilts. 10-year gilts are yielding less than 0.5%, 30-year just over 1%.

And while the government might expect to pay a slightly higher rate than this on the issuance of new gilts, long-term interest rates remain significant below 2%, the long-run expected rate of inflation. The real cost of borrowing is negative. Markets are almost pleading with the government to borrow, particularly borrowing that improves the economy’s productive potential.

Javid can also argue that other avenues have been exhausted, most notably that of trying to get the private sector to take up the infrastructure burden. George Osborne’s ambition was to align the desire of pension funds and insurance companies for stable long-term returns with the need to spend more on infrastructure during a time of austerity. The results were disappointing, partly because the institutions did not want to be landed with project risk. The new chancellor can say that he is cutting out the middleman.

£100bn more infrastructure spending over five years would raise public sector net investment by around 1% of gross domestic product and would make a meaningful difference to this country’s record. And, while the rewards of better infrastructure on, for example, productivity, accrue over the long-term, this is one area where you cannot put off until tomorrow what can be done, cheaply, today.

So is it all plain sailing? No, for these things never are. The fiscal timetable is already looking crowded for this autumn. There will be a short-term spending review, possibly next month, to give year-ahead allocations for government departments.

There is still the significant prospect of a no-deal budget, short-term fiscal measures to boost the economy in the event of the country leaving the EU without a deal. These measures could include dusting off some of the 2008 playbook, when VAT was cut, as well as direct measures to support businesses in difficulty. Javid’s £100bn infrastructure boost could be part of this, and the National Infrastructure Commission has identified some “shovel ready” projects, which could be put in place quickly.

My sense, however, is that the chancellor would prefer to unveil his infrastructure programme in a “peacetime” budget after the immediate Brexit dust has settled, say in November. That may or may not be possible.

Another issue is something the Treasury is never relaxed about, the state of the public finances. Government borrowing is low, after a decade-long fall but, while it is early days, the figures so far this fiscal year show that it is going up again.
Public borrowing so far this year is £6bn or 60%, up on last year, largely reflecting higher public spending. There is no cause for alarm yet but at minimum a presentational challenge lies ahead. Next month the figures will incorporate an additional £12bn a year of borrowing as a result of a change in the treatment of student loans.

A no-deal Brexit, leaving aside any fiscal measures introduced in response, would further change the picture, adding a potential £30bn a year to borrowing, according to the Office for Budget Responsibility.. Britain’s public finances, having surprised markets by how healthy they have been, would soon be shown in a much less flattering light. It would take some artfulness to add an additional £20bn a year to borrowing for infrastructure spending in this context. It can be done, but the markets would need to be carried along with it.

Finally, the biggest risk to Javid’s effort to put in place a game-changing infrastructure programme comes from his Downing Street neighbour. Boris Johnson has admitted to doubts about HS2, the high speed rail project, as well as once promising to lie down in front of the bulldozers to stop a third runway at Heathrow.

Neither project is perfect, and HS2 has many of the bad habits of infrastructure projects that we thought were behind us, including cost overruns and wasteful procurement. But if it goes ahead, we will wonder in future why there was ever any doubt about it, as is the case with HS1, which links St Pancras with the Channel Tunnel.

The review ordered by the government has put the project in doubt. It could be scrapped, or curtailed at Birmingham, to the chagrin of northern business leaders. Opposition to it, a combination of Nimbyism and ideological opposition from some think tankers to big public projects, is strong but it will be hard to argue that the government is serious about infrastructure if HS2 bites the dust.

It is not a question of using the money for other infrastructure projects in the regions, such as linking northern cities, both are required, as is the third runway at Heathrow. The decades-long farce over additional airport capacity in the southeast, similarly, cannot be allowed to go on for much longer.

It may be that the HS2 review is akin to the short delay Theresa May imposed on the Hinkley Point nuclear power station on taking office, before giving it the go-ahead, and that HS2 is given the green light later in the year, after the Johnson government has conducted its own due diligence..

If not, it will be hard for the government, and most particularly the chancellor, to argue that he is transforming Britain’s infrastructure. Big projects matter, as well as lots of smaller ones.