Published on 15 January 2024
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Can Labour’s fiscal policy really accelerate investment?

The shadow chancellor’s ambition to use the power of the Treasury to increase investment in towns, cities and regions is only likely to work if projects combine housing and transport at scale, writes Thomas Aubrey.

Rachel Reeves, the shadow chancellor, might be moving into 11 Downing Street later this year. In her FT column last year she wrote: “I want to use the power of the Treasury to get business round the table so that we can unlock billions of pounds of investment into our towns, cities and regions. I will work with, not against, our financial institutions.” 

The question remains how might this be achieved? Previous Labour commitments to increase investment stated: “we retain the ability to borrow for investing in capital projects which over time will pay for themselves.” Future government ministers will no doubt argue that all their projects will pay for themselves; but the harsh reality is that many projects will not. This is why the Treasury has always played a critical role in rationing expenditure. But the Treasury’s stance has also led to criticism that some projects that could generate positive returns are not given the go-ahead, particularly those outside the southeast of the country. Moreover, HS2 appears to have been awarded funding without sufficient details on its costs, which have since doubled leading to its partial cancellation. As such, it appears that the current approach of using the Treasury as the only assessor of value is difficult to justify.

My recent book on ordoliberalism and public policy argues that fiscal policy should be constrained by its ability to generate a positive real return and not by artificial central government rules. To do this, however, requires a superior assessment mechanism for projects. But this is exactly what the bond market does, although for reasons that remain obscure, successive governments have not decided to tap into the UK’s deep financial services expertise.

Bond issuance requires a prospectus to provide details on the deployment of any raised capital, and the identification of revenue streams to pay back the bondholders’ capital and interest payments. Investors also assess the creditworthiness of the entity issuing the bonds, and to what extent external support might be brought to the project should risks increase. Investor assessments of such projects are subsequently revealed in the demand for the bonds – at a yield related to its perceived risk.

This is exactly how the €35bn Grand Paris Express has been funded, which is building four new metro lines, extending two existing lines and adding 400,000 additional homes by 2030. While the French state is ultimately responsible for the financial obligations of the project in the event of insolvency, the risk to taxpayers is reasonably low given the identified revenue streams to pay back bondholders. Crucially, this approach facilitates greater fiscal devolution thereby avoiding the artificial rationing of projects centrally.

If this is Reeves’ strategy, then it will almost certainly raise the level of investment that is so desperately needed across the UK. But to achieve this, such projects must integrate transport with housing – which increases financial viability through the sale of residential land plots with planning permission to housebuilders. However, the UK has tended to develop transportation projects without integrating housing, as was the case with Crossrail I and HS2.

One example of integrating housing and infrastructure can be observed in the £350m bond issued by the University of Cambridge. The prospectus states the net proceeds will be used for general corporate purposes including “investment in research facilities, accommodation”. This relates to the North West Cambridge Development which requires “site infrastructure and landscaping” enabling 3,000 new units of housing to be delivered. The prospectus also states that “market housing, which will number 1,500 units, and retail and commercial developments contribute significantly to the viability of the development.” My estimates suggest selling 1,500 serviced plots with residential planning permission could generate around £180m of revenue to help pay back bondholders. The contribution from using the uplift in land values from selling housing plots to help pay for infrastructure and affordable housing was possible for Cambridge University because it was the landowner.

The recently passed Levelling and Regeneration Act provides greater flexibility to reduce land compensation payments related to alternative land uses or “hope value” when land has to be acquired for development, thereby enabling greater financial viability. This is something that many European countries removed decades ago starting with Adenauer’s government in 1953. The Baulandbeschaffungsgesetz made it clear that land compensation was not to be paid on potential changes in land use when acquired, thereby eliminating hope value. Indeed, this approach is effectively how the garden cities and new towns were funded before the 1974 Myers vs Milton Keynes case derailed such projects due to the need to compensate land owners for future alternative uses of the land.

If Reeves is willing to support large-scale, integrated transport and housing projects financed by the capital market alongside public money and some level of government guarantee, then the rate of investment could increase significantly. Indeed, this more localised approach to fiscal policy would help fund many viable projects including new garden cities, large-scale urban extensions and potentially the remaining sections of HS2 and Northern Powerhouse Rail.

There is not much evidence, however, that the rate of investment is likely to increase if Labour pursues the same old centralised approach to fiscal policy.

The views and opinions expressed in this post are those of the author(s) and not necessarily those of the Bennett Institute for Public Policy.


Thomas Aubrey

Thomas Aubrey is the founder of Credit Capital Advisory. He has written widely on financial and economic issues including All Roads Lead to Serfdom (2022), Profiting from Monetary Policy (2012)...

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