Infrastructure (Financial Assistance) Bill

Lord Giddens Excerpts

Tuesday 23rd October 2012 Lords Chamber

[Lord Giddens]

My Lords, I hesitate to disagree with two distinguished professors of economics from the same institution as me, the London School of Economics, and with my noble friend Lord Adonis. Actually, I do not mind; it is good to have a bit of controversy in these debates, even from the same side of the House. Anyway, I feel more positive about this Bill than they do.

To me, the Bill is quite interesting, set against a background of previous government policy and the Government’s previous approach to cuts. It seems to mark something of a move away from the Government’s formerly—if I may say so—somewhat primitive approach to cuts, which everyone accepts have to be made. In many areas the Government have looked for cuts in a simplistic and even counterproductive way by not analysing their knock-on consequences. As a result, we do not even know in some important areas whether the cuts that are made truly are cuts.

I will give an example from the sector that I know best, the university sector. In this country we have a number of world-class universities. However, the consequences for the economy of the Government’s migration policy are very debatable. I have looked at the figures provided by the country’s main university groups, and it seems to me that these measures have cost the country money, not saved it. If you do not look at knock-on consequences, you simply do not know what a cut amounts to.

It is also very important to say that the obverse applies—renewed investment does not necessarily imply more borrowing, even in the short term. Again, it depends wholly on the economic consequences for jobs, revenue and demand. Whatever the limitations of the National Infrastructure Plan 2011, it seems to make clear that infrastructure spending can have a multiplier effect on productivity, employment and demand. The Government should always seek to balance these things when looking to produce a more effective system of savings and growth for the economy.

Infrastructure investment is a key area for other reasons. The professor at Oxford, Dieter Helm, a writer I much admire for his work on energy and infrastructure, has recently edited what seems to me to be the definitive book on British infrastructure, which rejoices in the sexy title of Delivering a 21st Century Infrastructure for Britain. I do not know how many copies it will sell but it is a pretty good book. He makes the point forcefully that not many businesses would want to locate in the UK because of its infrastructure which,

“is not fit for the digital age and much of it is very carbon-intensive”.

It depends which ranking system you chose but in the most well used one, the Competitiveness Index, the UK ranks only 24th in the world for competitiveness in the area of infrastructure. The outgoing Labour Government must shoulder quite a bit of the blame for this situation. Even though I am a Labour supporter, the Labour Government’s record—my noble friend Lord Adonis will forgive me—in transport, energy and housing was not impressive.

I have four questions to ask the Minister. I know that he is going to want to reply to the bombardment from the noble Lord, Lord Adonis, but he might perhaps spare a bit of time for my pathetic little inquiries. First, infrastructure is a very wide category and the Bill makes it open to a diversity of investors. How will balance be achieved if too much funding concentrates on certain areas? How will priorities be determined? There is a lot on priorities in the national infrastructure plan but I cannot see the relationship between that and the Bill at the moment, especially if it is driven too much by who is actually prepared to stump up money rather than by an overall plan.

Secondly, the Government claim initial successes for their pension infrastructure platform but the problems of linking pension funds to infrastructure investment are well known. Only 1% of pension funds globally are invested in infrastructure projects—for good reason, as there are often high risks in the early stages of such investment and pension funds are not normally geared to such risk-taking. How will the Government confront this issue?

Thirdly, and importantly, where will the burden of risk end up? As these are long-term projects, will the burden of risk in the Bill end up with the public sector in most cases, and therefore will they, as I said earlier, involve far greater cost to the public purse than might appear in the system that is set out?

Fourthly, energy is mentioned often, but what will be the relationship between this Bill and the new Energy Bill, which I believe will be published next month? At the moment energy policy seems to me, and I think to most people in the industry, pretty chaotic, with the Prime Minister saying one thing and other Ministers saying something else, with the Treasury apparently holding different views from the Department of Energy and Climate Change. Do the Government recognise the need for at least a 20-year planning cycle for core energy supplies? Does this not imply getting well away from a strategy based largely on short-term market fluctuations? In other words, I do not see from this Bill and the plan how long-term planning is to be achieved. We know that it cannot be achieved by the methods of the 1960s and that it is difficult to plan on a long-term cycle when technological innovation and other innovations are inherently unpredictable. Planning there must be, though, and the Government should devote a lot more attention to what form this will take if their interventions in infrastructure are to be at least a little bit more successful than the noble Lord, Lord Adonis, thinks is possible.

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[Lord Skidelsky]

The noble Lord is quite right. The argument can be developed, but my point about picking winners and losers is that there is no empirical evidence for it being true, as a general proposition, that the state is more likely to pick losers than the private sector. We have had many examples of that not being true. The economic collapse of 2008 is a very good one.

[Lord Giddens]

Would the noble Lord accept that there is actually evidence that the state is quite often better? If you look at the history of energy industries and most technological innovations, they have normally been kick-started by government investment. This applies to all the major technology that has transformed our lives over the past 20 or 30 years.

[Lord Skidelsky]

I am happy to accept that. I was making a more modest claim.

A mere guarantee for privately initiated schemes is bound to be less successful, apart from in the efficiency of the schemes, at securing the required volume of investment than a commitment by the Government to a definite infrastructure programme. So while I wish UK Guarantees well, a certain amount of scepticism is in order.

In the final part of my speech, I want to consider what is happening to the economy. When an economy is crawling along the bottom, any small wave is likely to lift our spirits. Over the past three quarters—that is, the past nine months—the economy has shrunk by 1%. Even if, as now expected, it achieves a positive growth of about 0.8% this quarter, that still leaves it in roughly the same place as it was a year ago. Moreover if, as commentators suggest, this boost is due to the Olympics, it will be in the nature of a windfall. However much we may rejoice in the achievements of our athletes, 28 gold medals is not enough to turn the British economy around.

However, there is still a puzzle, which is that unemployment has been static in the past few months, and even falling slightly, despite the fact that output is flat and the economically active population has increased by 550,000 over the past two years. You would therefore expect unemployment to have increased. Why has it not done so? That is the puzzle. There are several possible explanations, none of them conclusive, because the facts necessary for a convincing answer are buried in a labyrinth of tricky statistics and slippery definitions. It may be that employers have been hoarding labour, but that becomes less plausible the longer the recession goes on. Part of the answer at least must be that productivity—that is, output per hour worked—has been falling. As the Guardian put it,

“it now requires many more of us to labour away to churn out the reduced volume of stuff”.

Falling productivity is just as serious a problem for the economy as rising unemployment, and a greater problem in the longer term.

The Prime Minister claims that 900,000 extra jobs have been created in the private sector over the past two years. I never know how many it is—sometimes it is 900,000 and sometimes it is 1 million; it goes up every day, but I am sticking to the 900,000 figure for the time being. That is not of course the net increase in jobs, given that 400,000 jobs have been lost in the public sector. The net increase in jobs has been 500,000. Can the Minister, the noble Lord, Lord Newby, tell us how many of the net gains in employment are full-time? Labour market statistics suggest that more than half of them are part-time or self-employed. Can the Minister also say whether those registered on government work programmes count in the Prime Minister’s extra 900,000 private sector jobs? The point is this: if a lot of the private sector job creation consists of part-time low-skilled jobs at the bottom end of the service sector, it would explain the decline in productivity that limits the rise in unemployment, but it is a poor omen for that vibrant, high-value economy that is supposed to secure our future prosperity.

I wish the Government well in these plans because I wish the country well, but we will need much more solid evidence than we have seen so far to believe that we have turned the corner and started to repair the damage of the past two and a half years.

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[Lord Newby]

My Lords, as predicted this has been an extremely interesting debate. I think I have been grilled by three LSE professors, which is probably par for the course in your Lordships’ House. I will do my best to respond to many of the questions raised. As an introduction, I have two points for the noble Lord, Lord Adonis. First, as far as I am aware, under the previous Labour Government’s plans there was an intention to have significant reductions to the deficit, about which not one word escaped the noble Lord’s lips. Presumably, had he had some ongoing responsibility he would have been trying to make sure that all that reduction had no impact on infrastructure spending. But that was wishful thinking. There would have been significant changes in infrastructure spending, even if the noble Lord was still in his former position.

Another point was made earlier by my noble friend Lady Maddock. Labour's record on housing and other areas of infrastructure expenditure, particularly social housing, hardly stands forensic scrutiny. It has certainly left us with a legacy on housing which we are struggling to put right.

The noble Lord asked a plethora of questions and I can respond to only some of them. His concern for the A14 is touching. I can confirm that it is a priority project. The Government announced in July that there will be support for an upgrade of the A14. As he surmised, the proposed scheme involves tolling. We are continuing to work on the funding package and are focusing on finding ways to bring forward construction earlier than 2018 by, among other things, streamlining the planning and procurement processes and identifying local contributions to the costs of the scheme. As my noble friend Lady Gardner of Parkes said, although circumstances are different in Australia, if other countries can do tolling it should not be beyond our ability.

The noble Lord asked about airport capacity and was scathing about the fact that we have now embarked on a review. Sadly, he did not tell us what Labour’s policy was in terms of hub airport capacity. The fact that I do not know what it is is no doubt a failure on my part. He also asked about HS2 and I can assure him that we are expecting a Bill on HS2 in the next Session. The Government are pressing ahead with the scheme.

The noble Lord referred to the fact that some 63 of the projects in the national infrastructure plan had vanished. That is true. It is the nature of large projects: some are brought forward and disappear and others come forward that were not there then. He will be relieved to know that next month there will be an update on the national infrastructure plan and he will be able to see not just which projects have dropped out but which new ones have dropped in.

The noble Lord asked why a second Bill concerning infrastructure was coming forward with infrastructure in the title—the Growth and Infrastructure Bill. That Bill has a completely different purpose from this one, although they have a single objective, which is to bring forward economic activity. That Bill deals with the planning and other non-financial constraints around getting housing in particular going. This Bill is purely a financial Bill.

My noble friend Lady Gardner of Parkes raised the desirability of getting more small builders operating. We agree. There has been a big reduction in the small building sector. We intend to support the establishment of a debt aggregator, which is an inelegant phrase. Such a body will be able to raise relatively large volumes of finance to lend to organisations such as builders needing smaller amounts of funding than a typical bond. It acts as a collective that will allow the money to filter down.

My noble friend also asked about the green belt and infilling. We are committed to safeguarding the green belt, but we recognise that there is some previous developed or brownfield land in many green belt areas that could be put to more productive use. We are encouraging councils to make best use of this land while protecting the openness of the green belt in line with the requirements of the National Planning Policy Framework.

The noble Lord, Lord Desai, accused us of doing a U-turn, or perhaps he congratulated us—I am not absolutely sure. He said that one of the problems is that the system is flush with money and he asked what the market failure is. There are two components, possibly. First, many companies are short of confidence to invest, largely because of the international economic situation. And secondly, the banking sector has not fully recovered from the great heart attack of 2008 and long-term lending in particular has not returned to the conditions that we saw before the crash. This is trying to help make it easier for banks which are very unwilling at the moment to lend in the long term, even for projects which in normal times they would lend on. As I mentioned in my opening speech, the volume of interest we have had suggests to us that this will be effective. The noble Lord said that many people are stuck because they cannot get a bank loan, which is undoubtedly the case. That is because of the problem that I referred to that the financial markets are not in a normal mode for long-term lending.

My noble friend Lady Maddock helpfully referred to the fact that the Government are committed to building 170,000 new social homes during the course of this Parliament. But she made the point that there are 390,000 new households being formed every year. We have a big problem and it is partly a cultural problem across the political parties. In the 1950s parties had in their manifestos figures indicating the number of houses that they were going to build. This was one of the key things that made Macmillan’s career. Housing has slipped down the political agenda and different sectors—health and education, for example—are vying for funds. We are all having to reassess the urgency of the need to get more funding into housing. It is a long-term issue and it is becoming more and more clear that it is a difficult issue; all parties, if you look at their performance in recent years, have tended to give it a broadly equal degree of priority, but it has probably not been a high enough degree of priority.

The noble Lord, Lord Giddens, asked me four exam questions and I will do my best to answer at least some of them. He asked about priorities and how Infrastructure UK decides between all the proposals coming forward. We have set out a menu of things, all of which are important, but there is not any artificial predetermination of priorities before we see what the applications say. Every application will be looked at on its merits.

[Lord Giddens]

Would the noble Lord agree that a menu is not a plan?