Tuesday 6 December 2016 4:20 am

Those who benefit from new infrastructure should pay for it

Philip Booth is professor at St. Mary’s University, Twickenham, and senior academic fellow at the Institute of Economic Affairs

To many people’s relief, there were not many big ideas in Philip Hammond’s Autumn Statement last month. In so far as there was anything new, it was the widely-trailed extra investment in innovation, infrastructure and housing.

The justification for spending money on these things is that it will raise productivity and growth. There is no question that there are investment projects around that, if pursued, would provide a return that easily justified their risk. However, when deciding if the government should spend more money, there are other considerations.

The first is that the £5bn extra that will be spent on housing, infrastructure and innovation by 2020 could have been used to cut taxes. In our badly designed tax system, there are plenty of candidates for growth-generating tax cuts: Stamp Duty would be close to the top of the list.

Second, more government investment may increase productivity in theory, but it does not follow that actual government spending on investment will do so in practice. Indeed, even within the newly announced spending, there are some oddities.

Read more: Hammond must focus on the quality of infrastructure spending, not quantity

By 2020, 30 per cent of the additional money will be allocated to a fund to provide infrastructure to facilitate new housing in areas of high demand. Why? In areas of high demand, the granting of planning permission can easily multiply the value of a piece of land 400 fold. In a reformed planning system, house builders should pay for their own infrastructure, as they once did when beautiful places like Bath, Eastbourne and large parts of Edinburgh were built.

A big chunk of the rest of the money will be spent on transport. Sadly, governments make bad choices when it comes to transport as decisions tend to be based on political considerations. In 2010, the coalition shelved three road schemes with very high benefit-cost ratios while it has gone ahead with HS2 which is much harder to justify. Actual government decisions do not bring the gains that theoretical government decisions are meant to yield.

We could do things another way. There are several mechanisms we could use to bring private finance into government infrastructure projects that could lead to better decision-making.

Read more: How the chancellor can satisfy pension funds' hunger for infrastructure

But, it is often argued that there are benefits that the private sector might not take into account such as the gains from local regeneration that transport infrastructure might bring. The new Cambridge-Milton Keynes-Oxford railway, to which Hammond has pledged support, is a good example. If this project is successful, it may raise economic activity in the surrounding areas such as Bedford. Surely, this justifies a subsidy?

However, the major beneficiaries of all these spillovers will be the local landowners who will move from being very rich to being incredibly rich as land values rise. As beneficiaries, should they not contribute towards the cost of infrastructure development and, if they did, would we not get better, less politicised decisions?

There are lots of ways this could happen. Local landowners could offer to finance the infrastructure as happened in the late nineteenth century with some commuter railways. Or the railway or road building company could buy and develop adjacent land, using the rise in its value to partly fund the cost of building the infrastructure – as the Midland Railway Company did with the iconic St Pancras hotel.

Read more: No, higher government infrastructure spending does not equal greater growth

Alternatively, government could levy a tax on any rise in land values which is the direct result of infrastructure development – especially where planning permission is given for new development around road and rail links. This would best be done through a localised tax system.

If those who benefited from more infrastructure paid for it, there would be better decisions and a fairer distribution of costs. The users of the Oxford to Cambridge railway and the local landowners who benefited from it would foot the bill instead of the citizens of Newcastle and other places miles away.