How Unbalanced is Infrastructure Spending?

[Posted by Prof Henry G. Overman]

Following BBC's Mind the Gap and my R4 Today discussion with Evan Davies and Ed Cox at IPPR North I've been thinking more about infrastructure spending and it's role in explaining urban economic performance in the UK.

As I discussed in a post last week IPPR North uses numbers for this that I think are misleading: "IPPR North's numbers which suggest we are set to spend £5,000 per person on infrastructure in London but only £250 per person in the North East. These figures are certainly striking, but they should be interpreted with considerable caution because they are far out of line with actual expenditure. Actual expenditure is reported in the Treasury's Public Expenditure Statistical Analysis Tables. According to those tables, in 2010-11 London received £800 per head (compared to an English average - including London - of around £400). But the second ranked region was the North West with £337 per head."

Following Ed's comment on that post I went back and re-read their 2013 update 'Still on the wrong track'. I remain to be convinced. Let me highlight three specific concerns (there are others) about the way in which these figures are misleading:

1) The £5,000 per head figure for London includes both private and public investment. If you look only at projects that involve the public sector as a funder the London figure is £2,500 per head. If you look only at projects where the public sector is the sole funder the figure is £770 per head. Of course, the figures for other regions drop too - the total for the North East is £250 per head, with some public sector or purely public sector it's £5 per head (presumably because there is no private sector investment in NE projects in the pipeline). I can see that the ratios don't shift much, but people who don't have time to think hard about these issues will focus on the headline number of either £2,500 or £5,000 per head for London. They will also tend to ignore any caveats about the role that private sector spending plays in driving these disparities. Which brings me to my second concern ...

2) Media coverage of these figures is highly misleading and this is misleading public debate. Here are three stories on the IPPR report - all courtesy of main stream media:

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Transport Spending Skewed Towards London (BBC website)

The government spends more money on transport projects for Londoners than on those for the rest of the country combined, a think tank says. The Institute for Public Policy Research North says £2,700 is spent per person in London compared with £5 per head in the north-east of England.

Track changes: The North East is being Hobbled by Lousy Transport (The Economist)

Partly as a result, public expenditure on transport infrastructure projects is £2,595 ($4,340) per head in London but only £5 in the north-east, according to IPPR North, a think-tank.

Transport Spending skewed towards London (The FT)

The think-tank calculated that Londoners received £2,600 per head compared to £5 per head in the northeast. Of all planned capital investment, it said, 89 per cent went to London and the southeast.

Ed Cox, director of IPPR North, said the government was failing to tackle the issue of regional inequalities in infrastructure. “Skewed spending benefiting London and the southeast is nothing new but as we head towards new announcements at the spending review, these figures will strike most people as deeply unfair.”

--

Any one reading these reports (especially the first two) would conclude that these figures tell us how existing public expenditure on transport is hugely skewed towards London. This is simply not the case. The best figures we have for the regional distribution of existing public expenditure on transport come from the PESA tables that I quoted above. To repeat, these show "in 2010-11 London received £800 per head (compared to an English average - including London - of around £400). But the second ranked region was the North West with £337 per head.

Of course, it's hard for IPPR North to control how the media use their figures. But here is Ed Cox, tweeting just before our R4 debate: "Looking fwd to discussing why London is doing so well with @EvanHD & @LSE_SERC on @BBCr4today tmrw - here's a clue pic.twitter.com/lBFywXqgor" If you follow the link you'll see that the graph uses the £5,000 per head figure. Further, at least to my reading, Ed is suggesting that these figures explain why London is doing so well. I find that confusing. How can future projections of differences in public expenditure on transport infrastructure, that are out of line with historical public expenditure, explain the role public investment plays in explaining the current economic performance of London?

3) It could be, of course, that historical expenditure from the PESA tables isn't a good projection of the future. For example, the historical figures showed an increase from £600 to £800 per head for London since 2008-09; while expenditure in all other regions is flat at around £300 per head. Perhaps the next set of PESA tables will show a huge leap in London to, say, £1,500 per head while the North-East drops to £5 per head. I think this unlikely - the pipeline is biased towards expensive projects that take a long time to build. Simply dividing by population then gives a very distorted figure of annual expenditure. But even a more modest continuation of past trends would see London's per-capita public expenditure pulling away from the rest. Whether this matters depends in turn on the extent to which public expenditure on infrastructure explains London's current economic performance. Pointing to future spending doesn't answer that question.


In short, these numbers are hard to interpret and they are being interpreted in ways that mislead public debate. They do not provide an accurate picture of how public expenditure has been distributed across regions in the recent past.  They do not tell us how much this has contributed towards the gap in economic performance between London and the rest.  Finally, it's not even sure that they provide an accurate guide to the regional distribution in future.

Decisions about public expenditure on infrastructure clearly matter for urban economic performance. I think the IPPR report raises an interesting point about the role of both private and public investment (where PESA only tells part of the story). I also agree that better future projections of the regional distribution of private and public infrastructure spending (that are consistent with PESA) would allow for a more informed debate. I'm afraid, however, that I don't see these numbers as they stand helping much with the latter objective.

Mind the Gap

[Posted by Prof Henry G. Overman]

On the Today programme this morning talking cities with Ed Cox (IPPR North) and Evan Davis - whose two part series Mind the Gap: London v's the Rest starts tonight on BBC 2.

You can listen to the debate here [about 2h 53m in].

The starting point - on which we all agreed - is that the geographic concentration of economic activity in London and the South East offers fantastic opportunities in terms of both work and play (as a result of 'agglomeration economies' arising from the benefits of physical proximity).

The points of disagreement relate to the extent to which this is sustainable and whether it would be possible to generate similar opportunities elsewhere.

On sustainability, Ed Cox specifically raises concerns about infrastructure - and points to IPPR North's numbers which suggest we are set to spend £5,000 per person on infrastructure in London but only £250 per person in the North East. These figures are certainly striking, but they should be interpreted with considerable caution because they are far out of line with actual expenditure. Actual expenditure is reported in the Treasury's Public Expenditure Statistical Analysis Tables. According to those tables, in 2010-11 London received £800 per head (compared to an English average - including London - of around £400). But the second ranked region was the North West with £337 per head. These headline figures are complicated by a number of factors. Many people from outside London use London infrastructure on a daily basis (because so much employment is based here). Also, more of London's spending is funded out of fares paid by people using the London transport system. For example, about 80% of the funding for railway services in London and the South East comes from fare payers, compared to only 40% for regional railway services. This document from the Scrutiny Unit provides further discussion. In short, there may come a point where the costs of London's infrastructure requirements become excessive relative to revenues (fares plus taxes) but it doesn't seem we are there yet.

Our second point of disagreement concerned the extent to which it would be possible to replicate London's success elsewhere in the UK. Crucial to answering this question is the role that scale and physical proximity play in driving London's success. The evidence suggests that these are pretty important - strong market forces, working via agglomeration economies explain London's success, and this is much more important than any bias on behalf of government. Don't get me wrong, I'm not arguing that there is no bias - England is a very centralised economy and that may distort the overall balance of expenditure. But we need to realise that strong market forces, rather than biases in public expenditure, are the driver of London's economic success.

Once we recognise this, it has fundamental implications for what a more balanced UK economy might need to look like. If creating similar opportunities to London requires similar scale and physical proximity, could we get anywhere near this by 'joining' up our Northern cities through greater infrastructure investment? I remain sceptical - not least because our work estimating the impact of quite substantial reductions in travel times between Manchester and Leeds suggests only modest economic gains. Joining up our Northern cities would help, but it would be expensive (remember those subsidy figures above) and it's unlikely that it would be enough to provide an effective counterbalance to London.

If balancing the effect of London requires somewhere 'big and Northern' that raises the very difficult question of where that place might be? Politics being what it is, I can see why many people (myself included) would prefer to dodge that particular question.