Britain is the fifth-largest economy in the world. On rankings of the World Economic Forum, it is the 24th in terms of the quality of its infrastructure. This disparity is a structural weakness and an impediment to George Osborne’s aspirations for sustainable recovery. Unfortunately, the chancellor shows little sign of imaginative thinking on how to improve Britain’s infrastructure. It is an omission he needs to rectify in next week’s budget.
Last October, launching the National Infrastructure Commission to supervise £100 billion of public spending, the chancellor declared: “I don’t want the time when we built the greatest infrastructure in the world to be a footnote in the history books.” This may be good politics, especially given Mr Osborne’s coup in attracting the former Labour transport secretary Lord Adonis to head the commission; but the economic rationality is so far lacking. There is an overwhelming case for more investment in Britain’s infrastructure in such areas as smart energy, broadband connections, better sewerage and more rail, airport and road capacity to ease congestion. Mr Osborne gives the impression instead of making grand declarations about high-profile schemes where the economic case is more marginal.
The reasonable criticism of infrastructure policy since 2010, under the coalition government and its Conservative successor, is that it has concentrated on big-ticket items at the expense of incremental improvements. Mr Osborne’s plans have focused on High Speed Two (HS2), the rail network linking London and cities in the north and midlands; London’s transport system; and energy.
There may be a plausible argument for all these projects. Yet Mr Osborne has not mounted a case against critics who accuse him of technological overkill. HS2’s projected cost of £55.7 billion needs to be explicitly justified when even the route is still undecided. Britain’s record on infrastructure is historically tarnished by capital projects whose sophistication outweighed their benefits to consumers. Mr Osborne’s grands projets may intensify the dominance of London at the expense of enterprise in other English cities. So long as infrastructure lags, then the productivity on which Britain’s fortunes depend will be hampered.
Britain’s infrastructure provision has been bedevilled by baroque planning laws and an obsession with the role of the state. It is one thing to acknowledge that infrastructure has to be a part of government policy. Any infrastructure scheme involves very high capital costs to build, and then low or marginal costs to operate. Without efficient infrastructure, the commercial sector will lack the distribution and the workforce that it needs to generate a profit. Yet the failures of the heavily regulated economy and nationalised industry were shown by Britain’s long relative decline up to the 1980s. The fascination of politicians with large-scale schemes has still not quite come to terms with the difficulty of estimating reliably the costs of big capital projects decades in advance, let alone the opportunity costs of spending the money in other ways.
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When the real cost of capital is so low, Mr Osborne should take a hard look at infrastructure priorities. Institutional funds are looking for a reliable rate of return. It would be easier to unlock that money if the Treasury concentrated on marginal improvements across a range of schemes.