Investing £30 billion in infrastructure projects over the next two years would both boost growth in the short term and increase the UK's potential economic output over the longer term, according to new research published today (Monday) by the Trades Union Congress (TUC) and the National Institute of Economic and Social Research( NIESR).
The TUC-commissioned research shows that the long-term impact of infrastructure investment on the debt to GDP ratio would be small. In fact, if the investment had even a modest impact on productivity, it would effectively pay for itself, in the sense that there would be no significant increase in the long-run debt to GDP ratio.
The research, written by Tatiana Fic and Jonathan Portes of the National Institute of Economic and Social Research (NIESR), uses NIESR's highly regarded macroeconomic model, NiGEM, to model the impact of different types of additional spending equivalent to one per cent of GDP for two years (a total of £30 billion).
The research looks at the short and long-term impact of these investment plans on growth, debt levels, unemployment and inflation. It also considers the effect in both 'normal' times, and 'crisis' times where household and business spending is constrained.
The research models the following scenarios:
- Increasing government consumption, such as departmental spending.
- Private sector investment, such as building homes and updating machinery or software equipment.
- Infrastructure investment, for example modernising the UK's transport system. An additional scenario further models the potential impact of this spending on productivity and hence growth.
The research shows that in each of the scenarios GDP is raised in the short-term - by more than one per cent in crisis times with government consumption and infrastructure investment - which then falls as the stimulus is withdrawn.
However, investment in infrastructure has the largest long-run positive impact, raising potential output and hence GDP by up to 0.5 per cent on a permanent basis.
The modelling finds that in all cases unemployment falls and inflation rises in the short-term, before returning back to trend levels in the long term.
The research also looks at the impact of different spending plans on the UK's debt to GDP ratio. In all cases the increased GDP growth resulting from additional spending helps mitigate the impact on debt. But if public infrastructure investment has even a modest positive impact on productivity, then over the medium term it will effectively pay for itself, in the sense that the long-run impact on the debt to GDP ratio is negative if implemented in crisis times.
Director of NIESR Jonathan Portes said: "This research shows that, if implemented now, increases in public investment in productivity-enhancing infrastructure could benefit the economy both in the short and the long-term, and would pose no risks to long-run fiscal sustainability."
The government's national infrastructure plan has indentified £310 billion worth of infrastructure projects across the UK. However, progress on starting these projects is painfully slow, says the TUC, as the Chancellor is unwilling to commit any public money and is struggling to secure sufficient funding from the private sector.
Very few of the projects identified in the government's plan have started and the government's capital spending budget is actually 42 per cent down from when it came to office. The Public Accounts Committee has recently queried whether the National Infrastructure Plan is "credible".
The TUC is calling on the government to put more public investment into infrastructure projects to create jobs and boost growth. Spending £30 billion now on an ambitious house-building project, as well as modernising the UK's transport, energy and communications network is the best way to kick-start our flat-lining economy, says the TUC.
TUC General Secretary Frances O'Grady said: "The government's self-defeating austerity plan means that the UK economy could be bumping along the bottom for some time.
"But a lost decade is not inevitable and infrastructure projects offer the perfect way to boost growth and create jobs.
"Any public investment will increase the deficit in the short-term, just as self-defeating austerity is causing the Chancellor to borrow hundreds of billions more. But investing in infrastructure pays for itself in the long-run by stimulating growth and creating the kind of economic conditions that businesses need to thrive."
She concluded, "With interest rates at historic lows, now is the perfect time for the government to launch an ambitious plan to build homes and modernise our creaking transport and energy networks."