WEEKLY COMMENT 26-11-2015
By Barry Edwards
There was very little that surprised anybody about the autumn statement except the abolition of the reduction of the tax credits. Politically the announcement was a face saving exercise and the pure luck that the Office of Budget Responsibility (OBR) managed to forecast an improvement in government finances of £27 billion got the Chancellor out of a big hole. The tinkering in many areas actually made this spending review a tax burden on business overall.
The blue book is the official document describing everything that has changed and you can read it or download it if you click on the link below;
For me the most interesting detail in the document is ‘Investing in economic infrastructure’ section on page 48. Extracts from that are below;
“The government will publish a National Infrastructure Delivery Plan next spring, setting out in detail how it will deliver key projects and programmes over the next 5 years.
The government’s spending means it more than meets its commitment to invest £100 billion in infrastructure in this Parliament – it will spend £120 billion. Since the Summer Budget, the government has increased its overall capital departmental investment plans by £12 billion between 2016-17 and 2020-21, and has brought investment forward into 2016-17 and 2017-18. Table 1.10 illustrates the government’s current and future capital spending throughout the UK.
Private investment is key to delivering our infrastructure, and the government will therefore extend the availability of the £40 billion UK Guarantees Scheme to March 2021, to continue to help infrastructure projects raise finance from banks and the capital markets.”
Also, another table that is interesting is on page 51 entitled ‘Investment across the United Kingdom’. It shows by region all the funding planned around the country.
For the rest of the document, you will have to pick out the specific sections that interest you.
The National Infrastructure Delivery Plan when it is published next spring will be something to comment on then. However, the main point I wish to make about infrastructure investment is that the government is not utilising all the possible methods to fund the investment and could manage the whole process more efficiently.
The £40 guarantee scheme was launched 2012, when private finance for infrastructure had been heavily constrained. To date, the Treasury has guaranteed £1.7 billion of finance across 8 projects and ‘prequalified’ (deemed eligible for support) 39 more projects which have a total value of £34 billion. The other most recent major scheme is the investment identified in the National Infrastructure Plan (£466 billion) which could result in up to £24 billion in guarantees, including the Hinkley Point C nuclear power plant (up to £17 billion).
As you can see, there is no real limit to the amount of guarantees that can be issued; it just takes a long time to get projects up and running. The government could move forward more quickly if the whole enterprise was moved to the private sector and taken away from the vast bureaucracy of the civil service. The problem with government guarantees is that they are included in the debt ratio against Gross Domestic Product (GDP) even though the funding comes from the capital markets.
My point about managing these projects more proficiently is that clearly the amount the government has outlined in the National Infrastructure Delivery Plan in the blue book is £120 billion and the National Infrastructure Plan mentions £466 billion. On the 23rd July 2015 (click on July under Archives in the right hand column) in this weekly comment we described the establishment of a UK Sovereign Wealth Fund which would allow the government to commit to the total amount identified without increasing the debt ratio and utilise the £120 billion much more effectively over a much longer period.
It would reduce the deficit substantially improving the chances of reaching a balanced government budget much sooner than forecast. For some strange reason they do not wish to look into anything like this and struggle with juggling the finances to achieve the forecasts of the OBR. The EU has managed to set up something similar to this and it is being implemented currently; it is referred to as ‘The Juncker Plan’ and has €315 billion available for use on infrastructure projects.
Another reason for considering something like this is the amount of tax revenue that the investment would generate for the chancellor. Again it would help with the budget deficit and together with the spreading out of the investment planned; it would generate £20-30 billion a year. By changing the whole approach to infrastructure investment without restricting any investment, government finances are improved greatly.
That’s all for this week, more observations next week.