Whoever wins the upcoming UK general election will face a very difficult set of financial circumstances, perhaps best encapsulated by the famous 2010 note from the departing Chief Secretary to the Treasury to his successor: ‘I’m afraid to tell you there’s no money left.’
National debt stands at 98% of GDP and more than £100bn a year is spent on servicing this debt. The Debt Management Office says there is little room to borrow more and the IFS says we have the highest tax burden as a percentage of national income since the 1940s. Whoever forms the next government is going to be severely fiscally constrained.
In such circumstances it is no surprise that politicians across the political divide are shaping their thinking about how to stimulate the infrastructure investment that underpins economic growth in the era of increasingly constrained government spending which will define the next Parliament.
In that regard, recent history can be instructive. It could be argued that today’s politicians face a similar set of choices to the those faced by the coalition after the surprise outcome of the 2010 election. Many of the questions about economic growth being raised today echo the debate then. How to make the UK a more attractive investment destination for overseas investors? How to bring forward significant national infrastructure projects to kickstart economic growth? And (that perennial issue) how to solve the housing crisis?
The good news is that the history of the last decade offers lessons – if politicians want to learn them. First, political effort expended in attracting overseas investors has been largely irrelevant to the investment that Britain actually received. If the geopolitical environment is favourable and the investment opportunity is attractive to highly mobile international and domestic investors alike, they will invest.
On the flip side, changing geopolitical dynamics and national security concerns have totally undermined the political efforts to woo overseas investors, most notably (but not exclusively) the Chinese. They turned out to be significant geopolitical rivals, rather than partners in a new golden age.
The other bit of good news is that there is an abundance of capital looking to be invested in the UK. Domestic life insurance companies like Pension Insurance Corporation and our peers are expected, if there are sufficient projects available, to invest around £200bn in UK infrastructure and built environment projects over the next decade. These investments support policyholder pensions and create significant social value.
This means that the more important question for politicians is: what are we seeking to attract investors to invest in? At the moment, there simply aren’t enough projects to meet investor demand.
Whilst prestigious national infrastructure projects are clearly important in context, they are notoriously difficult to bring forward and are risky to invest in because they are prone to delay, overspend, and even cancellation.
So the main political focus should be on helping local and regional government bring forward the projects that will regenerate our towns and cities, provide high quality jobs, bridge the skills gap, and drive regional growth, whilst achieving key policy goals, such as the provision of good quality, climate-friendly housing.
This means that Westminster policymakers should focus on less glamorous, but nevertheless crucial-to-solve, issues. These include the quality and quantity of planning officers in local government planning teams and the interplay between regulators and arm’s length bodies and what this means for growth and prosperity.
They should be thinking about how to encourage genuine public-private partnerships with local government; how to raise governance standards within local government, including the production of investment data, long-term plans and so on. They should understand how the convening power of central government can support and enable local authorities to bring forward investable opportunities with sufficient scale to make them attractive investments for long-term institutional investors.
Such reforms would move us away from the mistakes made after 2010 by opening up a new wave of investment across the UK. They would also help insulate the economy from a geopolitical environment which is much more volatile than it was then.
Hindsight is a wonderful thing, but the lessons of 2010 can help to chart a path through the fiscal constraints that the next government will face. Those constraints will leave little room for error as the next government seeks to encourage the right sort of infrastructure investment to deliver economic growth.
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