George Osborne’s Budget: a lost opportunity on infrastructure

Kaveh Pourvand, 20 March 2013

The Chancellor has committed only £3 billion to extra infrastructure spending in today’s budget, falling well short of the £40 billion, for example, that the CBI has advocated. Companies are sitting on hoards of cash (£800 billion) and interest rates remain at historic lows as investors look to park their money in safe government debt. This suggests that there is a lot of under-utilised capacity in the economy that could be brought to play if the government adopted the right policies. The low interest rates mean that the markets are, as Martin Wolf has pointed out, signalling to the government to borrow and spend.

There is a debate about whether infrastructure should be boosted by slowing the pace of fiscal contraction or by re-allocating the government’s existing spending plans. The government could still have boosted infrastructure spending yet further and maintained its current deficit reduction plan under the latter option. Either way it is puzzling that George Osborne did not allocate more funds to infrastructure spending, as The Economist magazine and Telegraph columnist Roger Bootle – not exactly doyens of the radical left – have advocated. It is widely recognised that the multiplier effect of major infrastructure investments is more than one. In other words, the government will get back more money on them than it spends – especially given the low borrowing costs.

Crucially, higher infrastructure spending would have stimulated economic activity and possibly encouraged companies to spend their large cash reserves, thereby putting the economy back on the path to growth. This looks a lot like a lost opportunity.