It Takes Some Money to Fix the UK’s Foundations

It’s a familiar sight in Britain: An elected official standing up to cancel investment projects on the grounds that they are unaffordable, poor value for money or the malevolent design of an incompetent predecessor. The most notable recent example was former Prime Minister Rishi Sunak’s decision last year to scrap the northern leg of the HS2 high-speed rail line. Now it’s the turn of Rachel Reeves.

On Monday, the newly installed Labour chancellor of the exchequer binned billions of pounds of road and rail projects and placed a hospital-building program under review as part of a strategy to address £22 billion ($28 billion) of unfunded spending commitments run up by the previous Conservative government. The claim of a hidden shortfall was hotly disputed by the former chancellor, Jeremy Hunt. In the view of Reeves, the abandonment of infrastructure works — along with other cost-saving measures such as cutting winter fuel payments to some pensioners — are decisions taken reluctantly in extremis. But there’s always a reason.

The axed road developments include a £2 billion tunnel under the Stonehenge monument in southwest England, a project designed to ease traffic congestion on the A303 that has been particularly controversial. The prehistoric stone circle is a Unesco World Heritage Site, and campaigners have challenged the plans in the high court. Another of the scrapped projects, the A27 Arundel bypass in southern England, has attracted opposition from wildlife campaigners. Meanwhile, Reeves also ditched “Restoring our Railways,” a program to reopen closed lines and stations that was started under the government of former Prime Minister Boris Johnson.

The individual merits or drawbacks of these projects are neither here nor there. The point is that this is a suboptimal way to make infrastructure decisions. Britain is a low-investment country, typically spending less than most other developed nations as a proportion of the economy. A key reason for this, identified by London-based think tank the Resolution Foundation, among others, is the ability of the Treasury to impose cuts in capital investment programs at times of fiscal constraint (which, if you’ve been following the UK economy for a while, you will know can be quite a lot of the time).

Britain's public investment in assets such as infrastructure lags behind the average for other Group of 7 countries

Inadequate investment has been linked to Britain’s persistent problems of low productivity and lackluster growth. Given that Labour has made kick-starting the economy its primary mission (the “only way to sustainably improve our public services and sustainably improve our public finances,” as Reeves said on Monday), the government might be expected to be keen to break out of this loop. The chancellor’s statement shows that the penny-pinching Treasury syndrome remains in place.

The language used by Reeves reinforces that impression. The chancellor repeatedly uttered the phrase “if we cannot afford it, we cannot do it.” Notwithstanding the parlous state of public finances, this is a curious emphasis for a government supposedly dedicated to reconstruction. A distinction should be drawn between current spending and investment in capital assets — such as roads, railways, hospitals and other essential infrastructure — that add to the productive capacity of the economy. It is a long way from “anything we can actually do, we can afford,” as John Maynard Keynes said in 1942, another period when Britain faced a few fiscal challenges.

Infrastructure projects take years, sometimes decades, to plan and execute. Some will inevitably pass from one administration to another, meaning they need to be insulated from the urge of politicians and bureaucrats to tinker. It is always easier to cut capital projects, where the negative consequences take longer to show up, than current spending. But revisiting programs that have already been through a process of democratic consultation and ought to be set in stone costs money and causes waste. The perfect illustration of that came on the same day as Reeves’ speech when the HS2 annual report showed that Sunak’s cancellation of the Birmingham-to-Manchester second phase cost £2.2 billion.

It’s not as if Labour hasn’t recognized the issue. In its election manifesto, the party said it would end the “chaos” that had seen major projects abandoned, decades-long delays and crumbling buildings under the Conservatives. The party committed to a 10-year infrastructure strategy that would guide investment plans, give the private sector certainty about the project pipeline and create a new body to set priorities and oversee delivery.

None of that will mean much if those holding the purse strings are able to cut whenever the budget squeeze is on. Reeves has promised to “fix the foundations” of Britain’s economy, another phrase that had multiple outings in Monday’s speech. The chancellor nodded to household economics in insisting on the affordability of plans. The metaphor might be better applied here. Try fixing the foundations of your house without spending any money. The question isn’t whether you can afford it, but whether you can afford not to.


Bloomberg