Smart Cuts

With the public finances in such dire straits all political parties have acknowledged the need for cuts but no one quite knows where the knife will fall. Reports suggest that the Transport budget will face substantial cuts in the years to come; cuts totalling £29 billion over ten years have been reported.  It is hard to imagine a responsible fiscal policy that didn’t curb transport spending and the cuts will have to be even deeper if other areas, like health and international development, are ring-fenced.

With cuts absolutely necessary it is important for politicians to start thinking seriously about how they can make the best use of scarce resources. Interesting research released yesterday by the British Chambers of Commerce (BCC) has made this very point, calling for the government to prioritise the shrinking transport budget carefully.

The BCC highlight 12 key transport infrastructure projects that will cost £29.8 billion over the next five years and will deliver an estimated £85 billion in economic benefits. This works out as a 2:9 cost benefit ratio. The £29.8 billion over five years consists of £3.1 billion a year from public finances combined with a £14.3 billion injection from the private sector.  There is a huge margin for error, and optimism bias, in these kind of analyses.  But the BCC do seem to have chosen some sensible projects that we should try to find room for whatever the size of the transport budget.

Our research shows that prioritising spending on road and commuter rail projects is essential to easing congestion on our transport system, which imposes huge economic costs.  The roads, in particular, deliver far more capacity – in terms of the number of passengers and amount of freight moved – for every taxpayer pound spent. Eleven of the twelve projects that the BCC argues should be safeguarded are road improvements or rail projects focussed on providing for commuters.  Eleven of the twelve are also regional, which will aid economic growth and job creation in areas where it is desperately needed.

The only national project, aimed at long distance travel rather than regional commutes, is the building of a third runway at Heathrow, which if not built the BCC warns could cost the UK economy £1 billion a year.  Thankfully, the third runway would be funded by private sector investment rather than taxpayer subsidy.  Interestingly the BCC is on both ‘Team High Speed Rail’ and ‘Team Third Runway’, stating that these projects should run alongside each other. The BCC however suggest that any decision made about the third runway should be made independently of high speed rail and not in an either or type option that is currently politically popular.

It is this type of work exploring the choices that will need to be made in the face of a fiscal crisis that is needed right now.  The same kind of thinking should be applied to other areas of public spending.  For example, the Conservatives are currently talking about ring-fencing International Development budget and the NHS. Excluding those areas from cuts means that other departments have to find even greater savings. Cuts must be made across the board, but they must be smart – policymakers need to put more specific thinking into where cuts will have the least impact on British businesses and families.

We’ll be exploring these issues more – across the public sector – in the upcoming book How to Cut Public Spending (and still Win an Election) 

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