Infrastructure Spending and Economic Growth: a Briefing

Abstract

Chancellor Philip Hammond has been urged to increase government infrastructure spending to counteract any economic slowdown (demand management) and to improve the productive potential of the economy (supplyside reform). Yet the ‘Keynesian’ function of infrastructure spending ignores the opportunity cost of such activity. Even if it worked theoretically, timing problems create challenges, whilst cutting spending in ‘good times’ is resisted. Importantly, it’s impossible to argue there is a ‘demand-deficient’ high unemployment scenario in the UK now which requires new economic stimulus. Good infrastructure can enhance the productive potential of the economy, but the political decision-making process often leads to bad decisions on spending, whether that is for electoral reasons or inefficiencies driven by a lack of market discipline. For example, the 2010 Comprehensive Spending Review cancelled many strategic road schemes with benefitcost ratios above 3, but pressed ahead with the planned HS2 with a benefit-cost ratio slightly above 1. The costs of the latter HS2 scheme keep getting revised upwards. There is little robust evidence of a systematic link between levels of government infrastructure spending and growth. In many ways, the government impedes the private-sector from delivering infrastructure.