30 November 2020

Will ‘levelling up’ mean London levelling down?

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“The economic emergency has only just begun” proclaimed the Chancellor at last week’s Spending Review. And the figures look very grim indeed: borrowing will total nearly £400bn this year, with projections suggesting that Britain’s debt pile will grow by north of £100bn a year for the foreseeable future.

Difficult choices on spending lie ahead. Indeed, the Government is already contending with these: Rishi Sunak has, for instance, announced that Britain will spend less than 0.7% of GNI on international aid despite this breaking a manifesto commitment.

But the pandemic has, so far at least, not affected the Government’s planned level of infrastructure investment. The Chancellor is committed to the highest sustained level of public investment in infrastructure for 40 years, and the Government has finally published its long-awaited National Infrastructure Strategy (NIS) that lays out how it seeks to achieve its two core infrastructure objectives: ‘levelling up’ the UK and achieving net zero carbon emissions by 2050.

The Government is, for now, sticking to the fiscal remit of public expenditure of 1–1.2% of GDP on economic infrastructure. There is no doubt, however, that this is likely to increase next year, and the NIS has already given us an overview of the Government’s priorities.

There do, however, remain many unanswered questions, including the role that London should play in the levelling up era. The NIS states that “Levelling up the rest of the UK does not mean levelling London down”, and it is welcome that the Government has explicitly acknowledged this. But what does this mean in practice?

While the NIS commits to financing the completion of Crossrail, the Government pledges to “stop development on Crossrail 2” which “frees up investment to raise the performance of public transport networks in the regional cities towards London’s gold standard”. The question of whether Crossrail 2 should remain a priority is a valid one: future travel patterns are, after all, uncertain. But the language in the NIS suggests that resources originally allocated to Crossrail 2 will be diverted to other parts of the country, suggesting that more investment going to the regions may come at London’s expense rather than being truly additional.

There is also no clarity about future funding for Transport for London (TfL). In some ways, this is unsurprising: the Mayor of London and Government are still thrashing out an agreement to secure TfL’s finances during the pandemic period. But the NIS is silent on TfL funding. The long-term solution is to give London further fiscal devolution powers, which would allow TfL to diversify its sources of income away from fares revenue. Indeed, if the Treasury does not give the capital sufficient grant for its transport needs, they will have to give London the tools to raise more money for itself. Yet there remains little prospect of this. The English Devolution White Paper has been delayed – and while there are likely to be welcome powers for other city regions, it remains to be seen whether London will get what it needs to secure long-term funding for its transport needs.

On infrastructure more broadly, there is an overarching question of how large levels of spending can be maintained in the longer-term at a time of strained public finances – both in London and the UK more broadly. There is clearly a need actively to attract more private capital into the infrastructure sector.

It is welcome that the NIS announces the creation of a new British Infrastructure Bank, which can offer more tailored support to focus on providing finance to projects that would struggle to attract private capital without assistance – particularly innovations related to the net-zero carbon agenda. But the operations, mandate and scale of the bank are yet to be detailed.

There is also a need for clear guidance as to what models the Government wants to use to facilitate private capital into infrastructure. PFI is well and truly dead – the NIS is crystal clear that no similar models of private finance will come forward – and the Government argues that changes are required to existing models in, for example, economically regulated industries. But, again, we have will have to wait until next year to find out more, leaving prospective investors into UK infrastructure with remaining uncertainties.

Publication of the long-awaited NIS is welcome, but there are lots of unanswered questions about whether sufficient private investment will be attracted into UK infrastructure to “level up” the UK – and whether the Government can avoid London being levelled down.

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Daniel Mahoney is Programme Director for Economy and Infrastructure at London First.

Columns are the author's own opinion and do not necessarily reflect the views of CapX.