As widely expected, the Chancellor has used his first Autumn Statement to boost funding for the UK's infrastructure, to counteract any negative effects of Brexit.
Raising productivity is the central long-term economic challenge facing the UK and will be a key area of focus for the Government's forthcoming Industrial Strategy. According to the Chancellor, if the UK raised its productivity by one percentage point every year, within a decade it would add £240 billion to the size of the economy; £9,000 for every household in Britain. The government’s approach to raising productivity, set out in the 2015 Productivity Plan, is based on encouraging long-term investment in economic capital, such as technology, innovation, infrastructure, and skills; and creating a dynamic economy which ensures resources are put to their best use. The fundamentals that underpin this plan have not changed.
Infrastructure financing and delivery
- UK Guarantees Scheme
This Treasury-backed infrastructure bonds scheme will be extended beyond the life of this Parliament, to at least 2026, and the government is working with industry to understand the demand for construction-only guarantees.
- Private Finance 2 (PF2)
The government will develop a new pipeline of projects that are suitable for delivery through the PF2 Public Private Partnership scheme. A list of projects to make up the initial pipeline, covering both economic and social infrastructure, will be set out in early 2017. As yet, we do not know how much the government will invest in PF2, nor what the pipeline will look like. We can get clues from March's National Infrastructure Delivery Plan which said the (previous) government was planning to invest £23 billion in education projects, £24 billion in health projects and £1.3 billion in prison projects until 2021, although not all of these will be funded through PF2.
- Infrastructure performance
The Chief Secretary to the Treasury will chair a new ministerial group that will oversee the delivery of priority infrastructure projects. The Infrastructure and Projects Authority will lead a review to identify ways government, working with industry, can improve the quality, cost and performance of UK infrastructure. The review will report in summer 2017.
National Infrastructure Commission
Mr Hammond wrote to the NIC setting out its fiscal remit of gross public investment in economic infrastructure of between 1.0% and 1.2% of GDP in each year between 2020 and 2050, which was welcomed by the NIC's deputy chair. According to the Autumn Statement, "this would mark a sustained, long-term increase in infrastructure investment."
In addition, the Chancellor announced that the subject of the NIC's next study would be how emerging technologies can improve infrastructure productivity. This will include electric vehicles, the Internet of Things and artificial intelligence. It is a real chance for the UK to become a world leader in this area – and of course a way of narrowing the productivity gap following a Brexit.
National Productivity Investment Fund
The Autumn Statement announces a new National Productivity Investment Fund (NPIF) which will be targeted at four areas that are critical for improving productivity: housing, transport, digital communications, and research and development (R&D). It provides for £23 billion of spending between 2017-18 and 2021-22 and will fund projects that demonstrate a clear and strong contribution to economic growth. This bulletin summarises the announcements on housing, digital communications and R&D. Transport is covered in our separate transport update.
The government will publish a Housing White Paper shortly, setting out a comprehensive package of reform to increase housing supply and halt the decline in housing affordability. To help deliver this, the Autumn Statement announces:
- Housing Infrastructure Fund – a new Housing Infrastructure Fund of £2.3 billion by 2020-21, funded by the NPIF and allocated to local government on a competitive basis, will deliver up to 100,000 new homes. The government will also examine options to ensure that other government transport funding better supports housing growth
- Affordable homes – the government will relax restrictions on grant funding to allow providers to deliver a mix of homes for affordable rent and low cost ownership. The NPIF will provide an additional £1.4 billion to deliver an additional 40,000 housing starts by 2020-21
- Accelerated construction – the government will invest £1.7 billion by 2020-21 through the NPIF to speed up house building on public sector land in England through partnerships with private sector developers. The devolved administrations will receive funding through the Barnett formula.
The government will invest over £1 billion by 2020-21, including £740 million through the NPIF, targeted at supporting the market to roll out full-fibre connections and future 5G communications. This will be delivered through:
- £400 million for a new Digital Infrastructure Investment Fund, at least matched by private finance, to invest in new fibre networks over the next 4 years
- a new 100% business rates relief for new full-fibre infrastructure for a 5 year period from 1 April 2017
- funding to local areas to support investment in a much bigger fibre ‘spine’ across the UK, prioritising full-fibre connections for businesses and bringing together public sector demand. The government will work in partnership with local areas to deliver this, and a call for evidence on delivery approaches will be published shortly after the Autumn Statement
- funding for a coordinated programme of integrated fibre and 5G trials, to keep the UK at the forefront of the global 5G revolution; further detail will be set out at Budget 2017 as part of the government’s 5G Strategy.
Research and development (R&D)
To help boost UK productivity the NPIF will provide an additional £4.7 billion by 2020-21 in R&D funding - an increase of around 20% to total government R&D spending, and more than any increase in any Parliament since 1979. The government will review the tax environment for R&D to make the UK an even more competitive place to do R&D.
The government has selected 8 areas for the second wave of Science and Innovation Audits: Bioeconomy of the North of England; East of England; Innovation South; Glasgow Economic Leadership; Leeds City Region; Liverpool City Region +; Offshore Energy Consortium; and Oxfordshire Transformative Technologies. The government is also announcing a further opportunity to apply to participate in a third wave of audits.
There will be £1.8 billion awarded to Local Enterprise Partnerships (LEPs) across England through a third round of Growth Deals to fund local infrastructure. £556 million of this will go to the North of England, £392 million to LEPs in the midlands, £151 million to the east of England, £492 million to London and the south east, and £191 million to the south west. Awards to individual LEPs will be announced in the coming months.
The government will also consult on lending local authorities up to £1 billion at a new local infrastructure rate of gilts + 60 basis points for three years to support infrastructure projects that are high value for money.
The Autumn Statement says that the government will continue to work towards a second devolution deal with the West Midlands Combined Authority and will begin talks on future transport funding with Greater Manchester. The government will transfer to London, and to Greater Manchester, the budget for the Work and Health Programme, subject to the two areas meeting certain conditions, including on co-funding.
It also confirms the Greater London Authority’s (GLA) affordable housing settlement, under which the GLA will receive £3.15 billion to deliver over 90,000 housing starts by 2020-21, and will devolve the adult education budget to London from 2019-20 (subject to readiness conditions). The government will continue to work with London to explore further devolution of powers over the coming months.
Alongside the Autumn Statement, the government has published a Northern Powerhouse strategy and will publish a Midlands Engine strategy shortly. The Autumn Statement confirms the arrangements for the Northern Powerhouse and Midlands Engine Investment Funds and the British Business Bank will make its first investments from the Northern Powerhouse Investment Fund in early 2017.
There are several mentions in the Autumn Statement of the forthcoming Industrial Strategy and the Autumn Statement provides the "financial backbone" for this. The strategy will set out the broader framework for government and business to work together to address key economic challenges such as building the skills base the economy needs and turning great ideas into commercial success. Innovation and R&D will play a key part in this and it is no surprise that the NIC's next study concentrates on how emerging technologies can improve infrastructure productivity.