he view from No.11 is pretty bleak at the moment, so we should forgive the Chancellor if he seems a little pessimistic. Official figures seem to confirm that the UK is set to end this year with a fiscal deficit of 14% of GDP – up from just 2% in 2019 and far worse than the 10% shortfall in the aftermath of the 2008 financial crisis. Public debt is predicted to rocket to well over 100% of national income, up from 80% last year, and just 50% in 2008.
The figures are further hampered by the fact that domestic industry is stagnant, and with much of the global economy still in lockdown, the UK’s total economic output could drop by more than a third in between April and June, the second quarter. This is despite massive and unprecedented government intervention through furloughing and grants schemes which despite their effectiveness in the short term, may not prevent businesses collapsing in the medium term.
We face a strange new world and we are slowly beginning to grasp its reality. The old political truths of a gentler age have fallen at the onset of a global pandemic. Whether we like it or not, the state will now play a bigger role in our economy in the years to come. As the nation and the Chancellor slowly come to realise this, we must be open to fact that this may not be the catastrophe we think it is, but rather an opportunity to meet the challenges of our time.
If the state is to play a larger role in the economy it must do so wisely differentiating between spending and investment. Day-to-day spending on services, vital though it may be, is very different from spending on investments that will grow the economy in the long run. If choices have to be made, and they will, then the Treasury should look to spend more on long term investment then daily spending if we are to rebalance our economy and grow our way out of this downturn.
To that end, the Government should commit to infrastructure projects that will help the entire economy escape this slump in the forthcoming spending review, the National Infrastructure Strategy and the autumn budget. These very public commitments will give the global finical markets the confidence they need to continue to invest in and back the UK. If we build it they will come.
So here are some more thoughts for the Chancellor to consider.
He must stick with his instincts and push forward the reform of the 'green book' rules which cover state metrics for the evaluation of public infrastructure spending. These have, for too long, skewed spending towards the South East. In accepting metrics that recognise the need for long term investment rather than prioritising a short term recovery, we will transform how we approach infrastructure investment. These reforms will provide a firm basis on which our recovery can be built.
From there he should move forward with the full electrification of our railways to ensure that both freight and passengers are moved around the country in the most environmentally friendly way possible. This would have profound implications for the Government's levelling up agenda as only a fifth of train routes in the North of England are electrified. This currently leads to much slower and crowded trains with far less frequent services, dragging on the region’s productivity.
We have been suffering with a housing shortage in the country for far too long. The Government should embrace a return to a sustained programme to build more social housing, partially funded by borrowing, and delivered by local authorities. This move can be made 'revenue neutral' if the houses are brought onto the state balance sheet reflecting them as the investment they are.
We must move forward with the decarbonisation of our energy networks through an increased commitment to green and renewable energy sources to power the country. Hydrogen power sources should be explored, and the national grid reformed to allow homes to become both producers and receivers of power to the network.
Home-working looks likely to be our future in the short to medium term! The benefits demonstrated to employers over the past few weeks has been considerable, but has clearly demonstrated the need for a fully established full-fibre network. The Government should not only invest in the roll out of the service, but also in a domestic consortium to both manage it and further develop our technical capabilities to ensure we are at the cutting-edge of digital technology.
So far I have focused on the Government’s role, but we must not ignore the very real contribution the private sector should make to our recovery. As an industry we must learn the lessons of Carillion and move beyond a system of 'under-bidding', significant late payments and creative auditing processes that have bedevilled how the private sector has delivered infrastructure projects.
We must also become more knowledgeable and nuanced about how we fund projects ensuring we develop new funding structures that guarantee projects rather than simply expecting the Government to pick up the cheque. This will involve us creating a new form of PPP that recognises failings of the past to deliver the undoubted potential of the concept.
Around the world local and regional infrastructure projects are often funded not by general taxation but through the raising of capital through municipal bonds from capital markets. Bondholders then see their investment returned through the revenues generated from both the fare box and the uplift in land values when planning permission is granted. Despite being used around the world, this funding mechanism is largely absent in the UK, as planning uplift here flows almost entirety to landowners. We should be developing the case for its use here as a way to bridge the gap between aspiration and fiscal reality.
Shifting to a system where uplift is split equally between landowners and local government would not only revolutionise housebuilding by taking much speculative pressure out of the market for land – land costs currently account for around 60% of the price of an average new-build – but it would also generate billions for new infrastructure from a new revenue streams as yet untouched by the Government.
Julian Francis is Director of External Affairs at ACE.