The Economist UK - 16.11.2019

The EconomistNovember 16th 2019 Britain 29

F

or thepast eight years the bankers,

lawyers and asset managers arriving

early each morning at Moorgate station

have been faced with building works.

Much of the area has been cordoned off as

the station expands as part of Crossrail, an

£18bn ($23bn) east-west transport link

across London. Crossrail was supposed to

be ready for the Olympic games in 2012. But

this week the timetable slipped once again;

the line is now due to open “as soon as prac-

tically possible in 2021”.

With British infrastructure in a ropy

state, both main parties are promising big

increases in capital spending, funded by

large increases in borrowing. The people

working around Moorgate will determine

whether these programmes succeed. Yet

the ones to watch are not the pinstriped

bankers, but the builders in hi-vis jackets.

Big spending is back in fashion. Under

the Conservatives’ new fiscal rules, public-

sector investment would rise from its cur-

rent level of around 2% of gdpto 3%. La-

bour would go further, more than doubling

investment, to over 4%. Both parties would

take government investment to the levels

that last prevailed in the late 1970s, spend-

ing about three times more on capital pro-

jects than was the norm under the govern-

ments of Margaret Thatcher and John

Major in the 1980s and 1990s.

With interest rates near historical lows,

raising the money is unlikely to be a pro-

blem. Economists have been arguing for

years that the government should take ad-

vantage of negative real interest rates to

upgrade the country’s infrastructure. But

this may prove to be easier in theory than

practice: actually spending the money

could turn out to be surprisingly tricky.

Governments have long struggled to

fulfil their capital-spending plans. The In-

stitute for Fiscal Studies, a think-tank,

found that the government of the day un-

dershot its capital-spending target almost

every year between 1992 and 2015. So en-

demic is the problem that when the Office

for Budget Responsibility, an official

watchdog, makes its economic forecasts it

assumes the government will fail to meet

its investment plans.

This time there are plenty of reasons to

expect a big undershoot. Noble Francis of

the Construction Products Association, a

trade body, says that “in construction you

can spend a little money very quickly, but

spending a lot of money is much harder.”

Small projects, like getting local councils to

fill in more potholes, are easy. But the big

programmes that let ministers dress up in a

hard hat to announce are not. Schemes like

the new railways in the north of England

planned by the Tories, or the large-scale

homebuilding and investment in green en-

ergy promised by Labour, cannot be

switched on at will by the chancellor.

Hey big spenders

The construction industry is already suf-

fering from the fallout of the Brexit vote.

Uncertainty has delayed investment.

Weaker sterling has increased the cost of

imports; building-material prices have ris-

en by 3% in the past year, twice the rate of

inflation. And many migrant workers have

left. More than half of Britain’s big contrac-

tors report problems hiring tradespeople

such as bricklayers and carpenters. Wage

growth in building is running at 6% a year,

compared with 3.6% in the economy as a

whole. The construction workforce, mean-

while, is ageing rapidly. About 500,000 of

the industry’s 2.4m workers are due to re-

tire in the next 15 years. Although many

construction trades can be learned in un-

der a year, productivity levels of newer

workers tend to be lower.

The splurges that both the Tories and

Labour are proposing would require high

levels of investment by the industry and a

change of approach by the government.

Firms will be reluctant to train new work-

ers without some certainty about the fu-

ture pipeline of work from the govern-

ment. The National Infrastructure Plan,

which includes £500bn-worth of projects,

is dismissed by construction bosses as a

wishlist, not a plan.

According to Judy Stephenson of Uni-

versity College London, the industry sees

the government as having a “stop-start, ad

hoc approach” to infrastructure planning,

which makes long-term commitments dif-

ficult. She argues that the recent pausing of

work on hs2, a high-speed railway between

London and the north, to review the busi-

ness case for the programme, has caused

resentment among contractors. With the

government seen as an unreliable partner,

builders will want to get a risk premium

written into their contracts, in case minis-

ters have a change of heart.

Neither party’s investment plan is wild-

ly out of line with international standards.

Spending 3% of gdpon public-sector in-

vestment, as the Conservatives propose,

would bring Britian up to the average

across the oecd, a club of mainly rich

countries. Even the 4% or so argued for by

Labour would be comparable to some other

European countries. The problems will

emerge if either party tries to hit its ambi-

tious new target too quickly. Pumping bil-

lions of pounds into an industry already

short of capacity and experiencing rising

costs is more likely to increase inflation

than national productivity.^7

Borrowing money is easy. Dishing it out will be harder

Fiscal policy

How to spend it

“You took your time, Boris!” The prime minister got a mixed welcome when he visited

flooding victims in Yorkshire and the East Midlands. More than 800 homes have been

inundated, according to the Environment Agency. One village, the unfortunately named

Fishlake, was evacuated. There was another reason for Mr Johnson’s visit: the Tories are

hoping to win a swathe of seats from Labour in the affected region. The floods, for which

some blame poor planning by the government, will make this task no easier.

Giving it some welly