Why Rachel Reeves' 'economic growth' announcement doesn't add up

Professor John Ball

In her recent “economic growth” announcement the Chancellor made much of proposed investment, especially the expansion of Heathrow and the new tunnel under the Thames.

Official figures have shown little or no economic growth since Labour took office in July, with Ms Reeves’ Budget imposing national insurance hikes on businesses, hitting confidence and potentially costing 50,000 jobs.

But the Chancellor’s “growth” speech at a medical equipment firm in Oxfordshire last month gave a notably upbeat assessment of the UK’s economic prospects saying the Government had “begun to turn things around”.

She highlighted the long-delayed Heathrow expansion project as an indication of the problems that had beset the UK economy and used her speech to defend the decisions she took in her first Budget, saying that taking the right decisions for the economy “does not always mean taking the easy decisions”.

Other schemes announced by Ms Reeves included:

• Plans for the Oxford-Cambridge corridor, which she said could become “Europe’s Silicon Valley” and add £78 billion to the UK’s economy by 2035.
• New reservoirs will be built near Abingdon in Oxfordshire and in the Fens near Cambridge. They will be among nine new reservoirs built as the Government has agreed for water companies to invest £7.9 billion to improve infrastructure.
• Funding for the East-West rail link joining Oxford, Cambridge and towns like Bedford and Milton Keynes that sit between them will be confirmed, as well as upgrades to the A428 road.
• A new Cambridge cancer research hospital will be prioritised as part of the new hospitals programme.
• Oxford will get a growth commission, similar to one set up in Cambridge, aimed at helping the city and surrounding region to grow its economy.
• The UK Government will back the reopening of Doncaster Sheffield Airport as South Yorkshire Airport City.
• A £65 million investment by the National Wealth Fund in expanding electric vehicle charging infrastructure.

This was presented, together with telephone number amounts of money.

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Multipliers

Big numbers make big headlines, but once the schemes announced are looked at carefully, the Chancellor’s lack of understanding of what drives economic growth becomes clear.

Economic growth relies upon what economists call multipliers; that is the amount of additional spending arising from the initial investment in a sort of ‘chain reaction.’

There are several theoretical definitions of what constitutes a multiplier, and the concept is invariably associated with the entire economy. However, for investment to have the extra required effect, it is also recognised that multipliers apply locally.

There are in practice two multipliers: long term and short term and are fundamentally different in the effect they have on the economy.

The long-term multiplier is self-evident. The investment provides an initial economic stimulus, but the real positive effect is the on-going spend that spills over into the local economy. A new airport is an example, once completed it has a substantial local effect through the supply of all manner of goods and services.

The difference with the latest announcement on Heathrow is that the airport already exists, as does its supply chain. However, the investment would result in a limited multiplier effect.

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Limited effect

The short-term multiplier has almost no on-going effect. The proposed tunnel will attract contractors and suppliers to the contractors but once complete there is no extra spending. It may have an extremely limited effect in say, shorter journey times, but that is it.

The point of this? Politicians of all colours enjoy the opportunity, whenever it comes along, to announce a grand investment scheme costing big numbers.

What they should do is ask about the future potential of the investment.

The two schemes costing together £23billion announced by the Chancelor will not result in any improvement of the UK economy. How much does she really know about economics?