Level Down - part 2

The Government promised to borrow to invest...but the Budget told a different story. Little on Housing and almost nothing for whatever the Government now calls Levelling Up. What a missed opportunity.

Before the Budget, the Chancellor made a big deal of her plans to borrow to invest. Various members of the economic great and good made supportive noises in public - Gus O’Donnell, Andy Haldane, Jim O’Neill.

In reality the OBR’s Economic and fiscal outlook opens by noting that:

‘Against a broadly unchanged economic and fiscal backdrop since March, this Budget delivers a large, sustained increase in spending, taxation, and borrowing. Budget policies increase spending by almost £70 billion (a little over 2 per cent of GDP) a year over the next five years, of which two-thirds goes on current and one-third on capital spending’

So the lion’s share of the money raised by taxation and borrowing is for day-to-day expenditure, not capital investment.

The OBR goes on to observe that ‘capital spending grows in real terms by 9.8 per cent in 2025-26 and then flattens off, before falling slightly in the final two years of the forecast.’

And, more worrying, it suggests that the ‘net fiscal loosening crowds out some private sector spending, including on business investment, which reduces the private capital stock by 0.7 per cent and potential output by 0.2 per cent in 2029-30’.

At the Despatch Box, Rachel Reeves talked about how the Government:

‘will invest an additional £100bn over the next five years in capital spending… only possible because of our investment rule.  The OBR say today that this will drive growth across our country in the next five years… and in the longer term increase GDP by up to 1.4%. It will crowd in private investment… meaning more jobs, and more opportunities… in every corner of the UK’.

In reality the OBR made no reference to the capital leading to a ‘crowd in’ of private investment (certainly not one I could see in the long Economic and Fiscal Outlook).

In fact the OBR made repeated references to the opposite effect.

The only reference to crowding in in the Economic and Fiscal Outlook document was actually in a footnote referencing an academic article ‘O. Tkacevs, Invest one – get two extra: Public investment crowds in private investment, 2023 estimates that, across OECD economies, each additional dollar of public investment eventually attracts two dollars of private investment’.

The OBR did say the measures would increase GDP by 1.4%…but in 50 years time…. by 2073-74. At that point Rachel Reeves will be about to turn 95. They said: ‘our scenarios show that, if sustained, the impact of the increase in public investment announced in this Budget on potential output in 2073-74 could range between twice and half our central estimate of 1.4 per cent, depending on the degree to which public and private investments are substitutes or complements’.

Keynes made an observation about the long-term….although hopefully I might just about still be around then.

What is the extra Capital being spent on?

The Budget included departmental allocations for next year. The Spending Review in Spring will set the wider apportionment. The OBR explains:

‘The largest year-on-year CDEL budget increases as a result of this budget-setting process are for the Department for Energy Security and Net Zero (£3.3 billion), Department for Health and Social Care (£1.8 billion), Department for Science, Innovation and Technology (£1.4 billion), and Department for Education (£1.2 billion), which make up just over half of the increase in CDEL totals between 2024-25 and 2025-26’.

[CDEL is essentially Whitehall-ease for departmental capital spend].

So as a result of this Budget, the department for Energy Security and Net Zero is getting a bigger capital boost than any other department. More even than the NHS!

Rachel Reeves made a big deal of new money for school repairs in her speech. In reality, she is spending around three times as much next year on Carbon Capture and Storage as she is boosting Education’s capital budget.

The breakdown of capital spend by department shows that capital spend on transport is being cut in real terms. So record tax rises and borrowing, and actually a cut in transport spend.

I found this pretty mind-blowing. How can you borrow all this money AND claim you’re doing it to fund capital projects to drive growth but CUT capital expenditure on transport?

Emblematic of this was Rachel Reeves’s decision to scrap the dualling of the A1 arterial road between NE England and Scotland.

The Budget document claimed it was not value for money.

Only the Treasury could argue something so obtuse. Again, this is a perfect example of why the Treasury’s Green Book rules (which control what is and isn’t value for money) need a fundamental re-write.

But it’s not just transport…

Housing and Levelling Up

The table above shows some increase in the Ministry of Housing’s capital budgets, but overall I was pretty surprised by how little new money there was for Housing.

This is contrary to the briefing given to the Sunday Times’ well-connected political team just days ago.

The Sunday Times wrote in mid-October that ‘the PM hopes a budget heavy on infrastructure and housing will help rebuild his fortunes’, adding:

‘Reeves is also expected to use the budget and spending review to announce a major cash boost to fund a new generation of social housing council houses.

‘It comes amid concern about a significant dip in affordable and social homes being built by housing associations, which are increasingly cash-strapped due to dwindling sales and having to fund cladding remediation post-Grenfell.

‘The housing sector is now awash with rumours that Reeves will announce a significant increase in the affordable homes grant, which distributes cash to local authorities and housing associations, as well as a potential 10-year guarantee allowing associations to raise rents in line with inflation’.

So the Budget did announce an increase to the Affordable Homes Programme (AHP), but a relatively small one. [The AHP ‘provides grant funding to support the capital costs of developing affordable housing in England’].

The AHP was given £11.5bn to run from 2021-26. In reality the money was spent faster and needed topping up. This was something we were looking at when I was in the Housing Department earlier this year.

But the size of the top up agreed at Budget is tiny - just £500 million for next year. The AHP has spent nearly £12 billion in a little over three years. So more than £3 billion a year. A £0.5 billion top up is small fry.

The Budget consulted on a five year social housing rent settlement of CPI+1%. The idea of a 10-year guarantee is only a ‘potential’ measure.

Other Housing, Communities and Local Government measures

More generally, there’s:

• no top up to the Local Authority Housing Fund - which received allocations of £500, £250 and £400 million across recent fiscal events. LAHF helps local authorities purchase, convert or build new homes, including to support arrivals for Ukraine and Afghanistan and is intended to ‘reduce the impact of recent arrivals on existing housing pressures and in the longer term will provide a new and permanent supply of accommodation for local communities.’

• nothing for improving housing quality.

• no successor to the £4.8 billion Levelling Up Fund. Labour previously criticised the programme for creating a Hunger Games style rivalry between Local Authorities. But rather than improving the scheme or switching to an alternative, there is no replacement at all.

• a cut to the Shared Prosperity Fund next year ‘in advance of wider funding reforms’ - ominous.

• no sort of other levelling up style intervention - no more Levelling Up Partnerships or a successor, no sort of Long Term Plan for Towns…nothing.

• a top up for homelessness and some more money for cladding work.

• nothing for Angela Rayner’s New Towns Taskforce. How on earth are these going to make any difference anytime soon?

• £10 million for Cambridge. Fine. Presumably this is different to the £10 million announced in the Spring Budget….let’s see. Although the Cambridge plan seems to have become more about East-West Rail than growing a new Cambridge Quarter. [That’s a mistake - I spy the hand of the Treasury!]

• ‘The appointment of Bek Seeley to chair the Euston Housing Delivery Group, to drive forward an ambitious housing and regeneration initiative for the local area’. This is a welcome continuation of the Euston work which was announced at budget.

• A few more planning officers which are welcome but amount to about one extra planner per council. Not a revolution. And anyway something the last Government was doing.

So small fry for housing. And nothing for levelling up - or whatever Labour are calling it now.

A hint of light was a commitment from the Chancellor that ‘Greater Manchester and the West Midlands will be the first mayoral authorities to receive integrated settlements from next year’ - good.

This is welcome although not the leap forward we were planning for devolution in Autumn Statement 2024.

And of course the Government bizarrely chose to cancel devolution deals with Norfolk and Suffolk just a few weeks ago….

Most depressing was the strange news buried in the Budget document that:

‘The government is minded to cancel unfunded Levelling Up Culture and Capital Projects, and the West Midlands culture and inward investment funding, that were announced at Spring Budget 2024, but will consult with potential funding recipients before making a final decision’.

This is self-defeating. These projects include about £50 million on:

‘revamping the National Railway Museum in York 

transforming parts of the Royal Albert Docks in Liverpool into a national museum

supporting the development of the country’s first National Poetry Centre in Leeds 

supporting the redevelopment of the Temple Works building in Leeds so that this historic site can serve as an eventual home for British Library North

funding for Venue Cymru in Llandudno

supporting the V&A Dundee for the remodelling and extension of their Scottish Design Galleries’

And an allocation of £5 million to areas which were identified as ‘Category One’ for Levelling Up but had failed to benefit from ‘government investment through one of our Levelling Up Funds: Coventry, Erewash, High Peak, Maldon, Mendip (now Somerset), Newport, North Northamptonshire, Redditch, and Worcester’. The precise purpose of that last bit of jam spreading was to ensure that by the end of the Levelling Up Fund, every part of the country which at the outset had been identified as most in Levelling Up-need, had received funding.

The other strange thing is that the redevelopments in York, Liverpool and Leeds are integral (so I was told repeatedly by officials from the Housing Department and Homes England) in the housing regeneration of those cities. And of course the new Government is determined to see those areas redeveloped. So why cancel the projects? More HM Treasury-led madness. Hopefully it can be reconsidered.

The V&A Dundee also happens to be a branch of a major UK museum in Scotland. The funding was very well-received - splashing the local paper. Is it really worth scrapping it to save £2.6 million? The answer is obviously no, so hopefully this will also be reconsidered.

I don’t really understand why these cultural projects have been scrapped beyond the fact that some of this funding was on a departmental ‘Kill List’ a few months ago and Angela Rayner has failed to fight the Whitehall battles well. Cultural projects are a crucial part of levelling up - building pride in place, creating stronger local economies, driving regeneration and so on.

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Stepping back and considering the budget overall, it truly is remarkable that Ed Miliband has emerged as the victor of the inter-departmental scramble for funding, and housing and levelling up have been (almost) entirely squeezed out.

You would have though that if Labour were serious about growing the economy through investment their priorities would be transport, housing and big regional capital projects. Instead, the sort of Green projects which Miliband is pushing such as Carbon Capture and Storage can’t be considered growth enhancing.

What a mess!