Not necessarily 5% of everything

Tweet When it comes to the way in which governments spend money, “need” - and I put it in quotes because although it’s easy to say, it isn’t at all easy to define – should be a more important driver than equality, a point which I highlighted in this post last week.  Ultimately that assertion is the basis of much of the argument for Barnett reform – Wales has greater need per head on average for those services which are devolved to the Welsh government and should therefore receive a greater share of resources.

It does not mean of course that that greater need is equally distributed across the whole of Wales (similarly, the English average is just that – an average - as well; it varies greatly across England).  It often strikes me as being incongruous, at the least, to see politicians arguing for a reform of the Barnett formula to give Wales a greater share, and then jumping on bandwagons about “postcode lotteries” within Wales when they see inequalities within our country.

Fairness is difficult to define when we look simply at revenue expenditure on devolved matters.  It’s even harder to define when we look at major capital infrastructure projects – such as HS2 for instance.

The call for a Barnett consequential for HS2 has a certain political appeal, supporting the narrative that Wales is losing out, but surely the nature of individual capital projects is that they will inevitably favour some areas over others.  The question of fairness is only relevant when looking at the total of all capital expenditure over a longer period rather than individual projects.

There’s a further complication as well – capital projects which impact major conurbations are likely to be more expensive in terms of £ per mile of road or railway than the same or similar projects in rural areas.  Does that mean that London “needs” more capital expenditure per head than Wales, and that a needs-based distribution should proportionately give a greater share to London?

Or what about the putative HS3?  If a line is built providing fast rail services to Bristol and Cardiff, what proportion of that expenditure should be counted as “Welsh”?  Probably 90% of the capital expenditure would be in England – but that would not reflect the way in which any benefits are shared.

I’m not actually arguing that London should get a greater share of UK capital expenditure; nor even that Wales gets her fair share at present.  But the simplistic response demanding our Barnett share of capital expenditure based on an arithmetical percentage of individual capital projects no more reflects need than does the current Barnett formula.  The question of fairness is far more complex than that.

It's all one railway line

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In saying that there must be a ‘business case’ for extending electrification to Swansea this week, the Secretary of State has not really said anything new.  The question needs to be asked however – how long does it take to produce one, and why hasn’t it been done yet?  After all, they’ve been in power for two years now, and as I recall, there have been some sort of figures produced before.  Does it really take two years just to review and update work done previously?

Personally, I’m not a huge fan of the vogue for producing ‘business cases’ in any event.  There’s nothing wrong with the concept, but as someone who’s produced more than a few of them over the years, I’m well aware that they have more to do with justifying why the preferred option is the right one than with an objective analysis of the options.  I wouldn’t say that creative writing is the most important skill in drawing up such a document, but it’s up there somewhere.

Figures in themselves are an important part of any story; but they rarely tell the whole story.  And many figures are the result of estimates, which themselves depend on assumptions, which in turn depend on prejudices and preconceptions.  In this case, it seems to me that the government is using the current absence of a business case as a fig leaf behind which to hide whilst they continue to delay.

Another way in which the use of business cases can be used to obfuscate rather than clarify is in the definition of a project.  In the case of rail electrification, the requirement to produce a separate case for Cardiff -Swansea electrification will produce a different answer than if that section were included in a single case for the whole route from Paddington – Swansea.  So the person who decides where to draw the line between projects has a great deal of influence on the final outcome.

It might be argued that splitting the project up into a number of smaller sections is a valid way of determining which bits are or are not viable, but to take that to extremes, a mile by mile analysis would almost certainly conclude that no individual mile was worth electrifying.  And even if the route is split more rationally into station-station sections, the viability of each section will also to an extent depend on what decision is taken in regard to other sections.

The real decision which Gillan and the Government need to justify is the arbitrary one they took to electrify only part of a major route in the first place.  There is a difference between seeing individual projects as part of a wider project to electrify the whole system and seeing it as just a series of projects each of which must be individually justified, and the latter seems to be the view of the government.  It’s a short-sighted way of looking at the question.

£170 million of lost opportunity

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The Welsh Government announced this week that it is working with the 22 local authorities in Wales on a scheme to use local authority borrowing powers to boost infrastructure investment in Wales.  This looks, in principle, very similar to the proposal floated by Gerry Holtham some time ago, and effectively circumvents the restrictions which prevent the Welsh Government from borrowing.

To that extent, it’s a welcome departure from the usual approach of simply blaming the Tories for everything.  I do have three reservations though.

The first is the scale of the plan – or rather the lack of scale.  Gerry Holtham suggested that it would be possible to use this approach to borrow around £2billion for spending over the five year life of a government.  In comparison to that, £170million looks remarkably unambitious.  It’s significantly less even than Plaid’s rather more modest Build4Wales, which suggested borrowing a mere £500 million from the private sector.

The second reservation is that it seems to be restricted to spending on highways projects.  Whilst I’m sure that at least some of those schemes will be worthwhile, investment in road schemes wouldn’t be my top priority.  And it appears as though the schemes haven’t even been selected yet – local authorities are being invited to come forward with proposals.

And that brings me to my third reservation – the lack of an obvious strategic driver behind the scheme.  Obtaining a large capital sum for infrastructure investment should be a real opportunity to take a strategic view and decide on the most important projects to boost GVA.  Instead of that, we have a bid-driven allocation of resources to local authorities – the availability of the money is driving the spending, rather than the infrastructure needs.

It’s what we’ve seen far too often from successive Welsh Governments.  It’s the same curse which afflicted Objective One funding and Convergence Funding – an attempt to please as many people as possible and share the cash around rather than use it to drive a step change.

Sadly, it isn’t that the Welsh Government doesn’t have strategies – those they have aplenty.  They’re all carefully written, consulted on, amended, approved, and filed somewhere, with all the right boxes duly ticked.  What they are not, however, are drivers of government action.

In going down this route, the Welsh Government was in serious danger of getting something right – it’s a pity that the implementation is another missed opportunity.

Stimuli, jobs, and multipliers

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The latest figures for unemployment once again bring to the fore the question of whether the UK Government is following the best economic strategy or not.  And the fact that a different approach in Scotland has apparently led to a different outcome will add to the demand for a change of policy, although I’d be cautious about reading too much into one set of figures – people who claim to have the answer too quickly can all too easily be proved wrong a month or two later.

There are some economists who favour one approach, and others who favour another – it sometimes seems that politicians are vying to see who can come up with the biggest name economists in support of their position.  But ultimately, the question is more a political one than an economic one, and has as much to do with the question of who wins and who loses during the process of recovery as it does with recovery itself.

In that context, recovery through fiscal stimulus rather than recovery through fiscal rectitude will inevitably be the favoured approach of those of us who see economic fairness as an objective, rather than merely looking at the overall bottom line.

There is a danger, though, that in advocating a particular approach we overstate the potential impact.  I don’t doubt that a stimulus, in the shape of spending on government capital projects, will benefit the economy, but the extent of that benefit depends on the multiplier effect, and some of the claims for the numbers of jobs likely to be created from a given stimulus seem to be assuming an extremely high multiplier.

What the size of the multiplier effect is – or even whether there is one – is a matter of some debate, as this article from the Economist demonstrates.  An estimate of between 1 and 2 is probably reasonable; yet some claims for jobs created seem to assume a multiplier of up to 10, a figure for which I can see no substantive supporting evidence.

There seems to be little dispute that an expanded programme of spending has a greater impact than a tax reduction of the same amount – because the multiplier is higher.  Although a temporary cut in VAT might be politically popular, it’s unlikely to have as much effect as investing the same amount of money in capital projects.  Those who are serious about wanting a stimulus should really be concentrating on capital spending rather than tax cuts; concentration on tax cuts looks more like propaganda than economics.

But they should not be overstating the impact of their proposals, particularly in terms of the numbers of jobs likely to be created.  Creating false hopes may look like good politics in the short term, but it inevitably leads to disillusion over the long term.