Infrastructure Bill [HL]

Lord Skidelsky Excerpts

Wednesday 18th June 2014 Lords Chamber

[Lord Skidelsky (CB)]

My Lords, a Bill on infrastructure that is mainly to do with the rearrangement of Whitehall agencies and minor improvements in planning application procedures invites the question of what the relationship is between its provisions and the promotion of investment in infrastructure.

My first point is that cutting public capital investment has been an integral part of the Government’s strategy for reducing the budget deficit—in fact, the only successful part. Gross public sector investment fell from £69 billion in 2009-10 to £45 billion in 2013-14 and has barely started to creep up. That is always how it happens. Cutting capital spending is much easier than cutting current spending. Private sector investment has not taken up the slack. Business investment remains 20% below its pre-crisis peak. These are permanent losses: infrastructure not built or improved in the past four years. My first question about the Bill is: to what extent does it replace or improve the assets forgone?

I read in the CBI briefing:

“'We fully support the introduction of the Road Investment Strategy which will, for the first time, set out a long term investment plan for the major road network. We believe this strategy will ease business concerns over stop/start investment and help build confidence in the supply chain about the future pipeline of work”.

I go along with that. But it is important to note that there is so far no road investment strategy. According to Schedule 1 to the Bill, the Secretary of State must provide a strategic highways company with proposals for a road investment strategy within one year. Further, there is nothing in the Bill that says the Secretary of State must co-ordinate the road investment strategy with the rail investment strategy, or with any other investment strategy affecting transport. For example, how will the road strategy mesh with the railway strategy, particularly HS2? How will it square with the Government’s energy policy? These are some of the blank pages mentioned by the noble Lord, Lord Adonis. What we need, surely, is an integrated transport strategy, covering roads, railways, air transport and shipping, with attention to energy use and environmental issues. Is any government agency charged with oversight of transport needs as a whole? I do not know. If not, I would support the Labour Party’s proposal for an independent national infrastructure commission to identify our long-term infrastructure needs. That surely is sensible. If there is a gap, the Bill should be amended to secure this aim.

My second question is: how much will the strategic highways company be allowed to spend? According to the Roads Minister, Robert Goodwill, the Government aim to spend £10.7 billion on major road improvements in the next five years. This will presumably be the sum allowed to the highways company—or will it? Is it identical to that sum? Can the Minister confirm my understanding of that, or have I got it wrong? If it is so, it seems odd to give the company £10 billion to spend before anyone has worked out what it is to spend it on. Perhaps that is another blank page.

My third question is: how will the new independent company be financed? Four years ago I proposed a national investment bank, capitalised by the Government, that would be allowed to borrow a conservative multiple of its assets. The model was very much that of the successful European and Nordic investment banks. What I envisaged then was up to £100 billion of infrastructure investment over five years, largely financed by borrowing. Instead we got the green bank, with capital of £3 billion and no borrowing power at all. Apparently, a continuation of this rather dismal set-up is envisaged now, as revealed in an unpromising exchange in the other place on 11 December 2013. I quote from Hansard:

“Richard Burden: To ask the Secretary of State for Transport whether the proposed Government-owned company replacing the Highways Agency will be able to borrow at (a) government or (b) private industry rates”.

Mr Goodwill replied:

“The new company will be funded directly from public funds and therefore it is not expected that external borrowing is going to be a requirement for financing activities. However the Department is still working on the detailed financial arrangements”.—[Official Report, Commons, 11/12/13; col. 220W.]

And it is still working, as far as I know.

The Labour Party seems equally cagey about borrowing for investment. It proposes to spend £10 billion to build 400,000 affordable houses in one year—something that the noble Lord, Lord Judd, endorses, as I do—but how is that going to be financed? We are not given a clue. There is a promise only to “bring forward” housing investment, but of course housing is one thing that one should be able to finance by borrowing because one has a stream of income to service the debt.

I should like to end by trying to clear up a common confusion about the role of borrowing in the Government’s budget. According to current orthodoxy, all borrowing, for whatever purpose, is bad and the ideal state of affairs to which every prudent Government must strive is an annually, or at least cyclically, balanced budget. However, that has nothing to do with the theory of public finance, which has always made a distinction between current account and capital account spending and the deficits allowable on each. A pure current account expenditure is for a good or service which gives rise to no government-owned asset that will produce future value. It should therefore always be covered by taxation. On the other hand, capital account expenditure is the purchase of a durable asset. If that purchase gives the Government command over a prospective future stream of returns whose present value is greater than or equal to the present cost of acquiring the asset, borrowing is justified because it does not give rise to a new debt.

The noble Lord, Lord Lawson, has argued that the current/capital distinction does not have the same meaning in the public as in the private sector because, in general, capital investments by the state do not produce a cash return to service debt interest. However, that is not always so—it is too sweeping. Some capital investments, such as utilities, railways and undergrounds, do produce a cash return. Others, such as roads and bridges, can be made to do so by road pricing or tolls. Even if the Government choose not to charge for the use of schools or hospitals, they can work out a shadow price in deciding whether to make the investment, setting aside revenues from tax to meet the service debt charge. Provided the expected returns, actual or imputed, equal the cost of acquiring the asset, borrowing will be justified since the additional debt will be self-liquidating.

I think that the Liberal Democrats are slowly buying into that distinction. For example, they have promised to borrow to invest in capital projects, but they would not revive Gordon Brown’s golden rule, claiming that Labour slapped the words,

“‘capital spending’ on anything and everything”.

Thus, they would not include under capital spending new schools or hospitals but only schemes which “boost economic growth”. But why should building roads and houses boost economic growth more than building schools or hospitals? Then they have a new debt rule which seems to make no sense, but at least goaded, I suspect, by the Secretary of State for Business, they are moving in the direction of making that distinction between capital and current spending which the Conservative parts of the coalition have rejected.

A House of Lords Second Reading on a limited roads Bill is not the place for a disquisition on the theory of fiscal policy and I apologise to the House for burdening it with one. However, it is important to make the point that dysfunctional public accounting conventions should not stand in the way of giving the nation the infrastructure which it needs and which only the public sector can make or underwrite.

--- Later in debate ---

[Baroness Kramer]

A number of other noble Lords asked whether the body would go out and seek private finance. It could do so only with the authority and approval of the Secretary of State, so it is no different from the current situation of the Highways Agency. The Government do not anticipate that that is what it will do. Quite frankly, borrowing through government costs significantly less, and this is an on-books entity. That is not something that this is meant to facilitate, if that is helpful.

[Lord Skidelsky]

Does the Minister expect that the Government will in fact borrow for their trunk road programme?

[Baroness Kramer]

I am expecting that the Government will borrow to fund the SHC—I hesitate to use the words “in exactly the same way”, but they will have a commitment, if you like, to the funding stream as a result of the roads investment strategy. They will fund the SHC in the same way as they would in effect have funded the Highways Agency. It is not a change. I understand that the noble Lord, Lord Skidelsky, would like to see the entity going out directly to the bond markets itself, but that is not anticipated; it could do so, but only with the approval of the Secretary of State.

[Lord Skidelsky]

But it is anticipated that the Government will fund it by their own borrowing; is that right?

[Baroness Kramer]

The noble Lord is talking to someone who does not understand quite how the government books work, but I do not recognise government borrowing being segregated into line items. However, I will follow up on that and write to the noble Lord before I tangle us in something that I have not explored in such detail. If the noble Lord is looking for imputed returns, we can discuss all that later.

The noble Lords, Lord Whitty and Lord Judd, raised the issue of Passenger Focus as a consumer watchdog. It strikes me as a superb representative of the road user. One of your Lordships suggested that the AA or other existing bodies act as a voice for the road user, but they tend to act as a voice for a limited number of views, typically those of car drivers. There are many other road users, and it is important that a much broader sweep, including cyclists, get represented. Using Passenger Focus, with its consumer skills, strikes me as a very important mechanism.

The noble Lord, Lord Whitty, and others also asked whether the Office of Rail Regulation was an appropriate body. It will act as a monitor, not as a regulator; that is an important distinction. The logic follows these lines. The SHC does not require an economic regulator in the way that Network Rail does. It is not dealing with track access charges and the users of the system are not paying in the way that passengers do, so there is really no role for an economic regulator here. There is not a number of TOCs all in competition with each other and with a complex relationship with Network Rail. It will advise the Secretary of State, who will then be able to enforce. It will monitor the operations of the new company.