End of austerity: a window of opportunity for infrastructure?
There is no denying that Brexit has sent shockwaves through the economy, and the business and investor communities. There are now conflicting opinions and in-fighting on economic blogs on what will be the immediate impact of Brexit. Nevertheless, sterling has seen a significant fall and there is consensus that the housing market, construction, and jobs will all be impacted. So if a Government is to attempt limiting the impact of these potential factors and stop us sliding into recession, a new Government should be formed quickly and act even quicker. The first part of this has been done with the speedy appointment of Theresa May. It is now the second part that both economists and Government are starting to turn their attention to as we navigate towards a new economic paradigm.
What was distinctly lacking from the Leave camp was what policy levers they would pull if the population voted in favour of Brexit. But it seems that the new Prime Minister may have identified one but it needed a ruthless political move. With the sacking of George Osborne. The former Chancellors’ political and economic mantra of austerity is going with him. The new Prime Minister has hinted that that the Government is now open to the idea of borrowing to invest in infrastructure. In one swift move the Government has given itself some political room to manoeuvre, no longer trying to meet tough fiscal targets that were continually being missed.
George Osborne used a simple political analogy in justifying austerity. He compared the Government finances to that of a household. So just like a household, in tough economic times the Government should also tighten its belt. Its simplicity served a useful political purpose but it forgot a very important point – Governments are not a household and are actually responsible for stimulating growth. With his political and economic credibility entwined with austerity, Osborne had tied himself in a political knot of his own making. Numerous economists had highlighted how with interest rates and gilts at record low levels, it has never been a better time to borrow for investment. So even if it was economically smart to borrow to invest and get the Northern Powerhouse going, it was politically impossible. Ironically it has been the austerity that Osborne introduced that helped create the economic petri-dish for Brexit sentiments to thrive, ultimately resulting in his downfall.
Even during times when he was easing austerity, the public message was still the same. So not only is the economic mantra gone but, equally important, so is the political message. This will allow for a broader public debate to take place and even stymie one of Labour’s credible lines on the industrial and economic policy.
This is not say that tight controls on Government spending are being scrapped. We will have to wait and see if the political rhetoric translates into reality but for the purpose of this blog let’s assume that the option is on the table. So the Government is willing to borrow to either underwrite or support new infrastructure that can vary from energy, schools, hospitals, transport or housing. The Government taking a stake in infrastructure projects is certainly not radical or new but it could help to reduce risk, lower the cost capital or even reduce CAPEX. There are not many developers or investors who would not welcome this.
The benefit for the Government is that construction of a fleet of new gas power stations or schools will help to ensure that construction does not lag. Alternatively a government supported house building programme could inversely result in house prices dropping further but it is widely accepted that a greater housing stock is one of the simplest and fairest ways to improve living standards in the long term. Plus, cheaper houses may allow people to get on the housing market and create some liquidity in the market helping to combat the shortfall in stamp duty.
As outlined, Government support for infrastructure projects is nothing new or radical. But it would be for a Conservative Government. This sort of investment would look and sound a lot like the now infamous Public Finance Initiatives (PFIs) of New Labour. So the Government would welcome a bit of re-branding of their investment and hear from industry on clever ways it can support without coming across as statist. Derision of PFIs is partly borne out of the fact that Governments are historically poor at spending or investing. But at the moment, spending on projects is probably better than any other alternative. This was a policy that Gordon Brown adopted after the economic crash in 2008 and was starting to reap rewards up until the 2010 General Election resulted in austerity that brought an abrupt end to the fledgling growth the UK was experiencing. Industry will have an important role in helping the Government to ensure that it is investing wisely and avoid the criticism surrounding PFIs.
So the low-key promise of government investment in infrastructure project does present a new opportunity for business. But industry will still have an important role in making this case to Government on why they should invest. It needs to be positive and undoubtedly look to solve numerous problems. It will have to be economically water-tight, with an in-depth cost benefit analysis clearly demonstrating a return of investment that can help fill the hole in public finances. But equally important will be focus on the in-direct benefits of investment. It will need to highlight the benefits for the UK supply chain and local content. For instance, can it use UK steel? How many direct and in-direct jobs is it creating in deprived areas? What is the multiplier effect beyond the immediate area of investment? Industry should not also put all of its eggs in the Government basket. You will still need to make the case across Parliament and look to backbenchers to be lobbying the Government for investment in infrastructure either in their constituency or for the national interest.
The road ahead is not easy for the Government. It will require significant due diligence and having the project as ‘investment ready’ as possible. Nonetheless considering the economic climate, the Government hinting that it is willing to invest could be creating a small but bright window of opportunity.