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I admit, my tastes might be slightly specialist. I love visiting construction sites. I’m a member of a group called Subterranea Britannica devoted to the appreciation of man-made tunnels. And I enjoy little more than the thrill of standing on bridges over TGV lines, watching trains speed by at 180 miles an hour underneath.

So you might want to ignore everything I say about infrastructure. I’m clearly a fan. But it’s one of the hottest topics in policy-making circles at the moment, and I’ve had a chance to reflect on it in recent months, making a two-part BBC2 series on the subject.

The filming has not just provided an excuse to get down and dirty with some of the best of British infrastructure – from the magnificent views on top of the Forth Bridge, to Hinckley Point B nuclear power station, to the London Array, soon to be the world’s largest off-shore wind farm. The series has also afforded an opportunity to ask whether we invest enough in it and whether we are much good at delivering it.

My main concern has not been the short term boost that infrastructure investment can provide to a moribund economy today, but the long term character of the country. The choices we make today on how much to invest and where, will help shape the economy we have over the next few decades.

First and foremost, infrastructure has the potential to provide space for growth. In front of me as I write this is a ball of clay, a souvenir I brought with me from an extraordinary trip I made while filming for the series on Phyllis. She’s one of the tunnel boring machines for Crossrail, the new railway line which will run from West to East right across London. Even as you read this, she’s burrowing her way from just outside Paddington towards Farringdon, building around 100m of tunnel a week. But what that line is doing, is giving London room to grow in response to a demographic surge – the population of London is projected to expand by just under 2 million in the next twenty years alone.

But infrastructure doesn’t just have to keep up with change – it shapes the economy and geography of the country as well. Indeed, it has been doing that since the industrial revolution. Britain’s first inter-city railway between Manchester and Liverpool for example, opened in 1830 and was built to carry raw material and freight between the port at one end and the mills at the other. But as with so much infrastructure, things didn’t work out as planned. It turned out that people wanted to travel between the cities too and the railway provided the best means for them to do so (the trains did go at 17 miles per hour after all).

The infrastructure was transformational – the north west of England had suddenly become smaller and new economic opportunities opened up as a result.

Our railway pioneers had stumbled across a phenomenon that modern economists call agglomeration. It is best to think of it as the economic dividend that you earn from bringing people closer together. It is the extra productivity you get by turning towns into cities. As employees and employers cluster, they are exposed to more ideas, more competition and they are likely to find the right personal fit.

Graduate couples for example, are disproportionately more likely to find jobs to suit both in a big city than in a small one. “The large and growing academic literature suggests that doubling city size will increase productivity by 3–8 percent” the World Bank says.

If it worked in 1830, there is every reason to suspect that shrinking distances and expanding travel-to-work areas will give the economy a boost today. That may be an argument for building High Speed 2 or more likely perhaps, an argument for investing in transformational infrastructure across the Pennines (a fast and frequent Crossrail of the north) to make a single travel-to-work area out of England’s great northern cities. If, that is, we have a few tens of billions of pounds to spare.

But agglomeration does not provide the only economic reason for thinking about investing more of our national income in infrastructure. The decisions we make now will shape the economy in other ways too. Where we invest matters? If the capital is to expand as a commercial services hub we need to keep developing urban transport, airports and power and water nearby. If we think that Britain’s manufacturing sector has shrunk too far and will bounce back then we need inter-city transport, freight facilities, ports and energy for other parts of the country.

This all gives us a case for more infrastructure in the south-east, which needs relief from the congestion its fast-expanding economy has engendered. And a case for investing in all the nations and regions aside from the south-east, which could do with the economic development it promises.

But there is a problem with all these arguments for spending more: we don’t really know what type of economy we are going to get. You can just never be sure that the promised benefits of any particular infrastructure project will ensue. Kevin Costner wasn’t right to say “build it and he will come”. Often we build it, and they never show up.

Critics think that is an argument against investing much now, when you can wait to see how things pan out. But as one of the country’s leading infrastructure economists, Oxford professor Dieter Helm, pointed out to me, “If you don’t provide the sort of infrastructure that a manufacturing economy might need, you won’t get one and it will be self-fulfilling. You’ll end up with a London based service economy”. Chicken and eggs abound in infrastructure.

These arguments about the risky choices we need to make are every bit as fascinating as the bridges and tunnels themselves. Funnily enough though, when it comes to infrastructure debate in the UK, these themes are often ignored. The debate is always and everywhere dominated by what one might call local factors. The case for HS2 or Heathrow expansion are debatable (and debated) in terms of agglomeration and Britain’s economic destiny; but I think most people see them as decisions about the quality of life in the Chilterns, Putney, Richmond and Windsor.

Of course, as I don’t have to make a decision on Heathrow or HS2, I’d be wise to avoid expressing a view. But I can offer one interesting observation about local interests from my own personal experience. Opinion is a fickle thing.

I was brought up in Ashtead in Surrey. For much of my childhood our village was terrorised by a fear of a monster that was heading towards us. It was called the M25. Normally upstanding locals set-up a protest movement every bit as active as any in operation today, disrupting a public inquiry with stink bombs and airhorns.

Needless to say, in the mid 1980s, the M25 came along anyway. Ashtead found itself a close neighbour of the new Junction 9 at Leatherhead.

And what do you suppose that the people of Ashtead think about the M25 today? Well, I had a lucky opportunity to test local views by conducting a rather non-scientific show of hands at the annual Village Day this summer. Would you vote to have the M25 disappear if I could click my fingers and remove it? The overwhelming view was that the M25 should stay.

It’s ironic that for all my excitement at the stunning engineering, it was a trip home to Ashtead’s village day which was provided the most revealing insight into Britain’s love-hate relationship with infrastructure.

The single most contentious issue in economic policy at the moment is whether the government should abandon its fiscal plan and slow down the pace of fiscal consolidation. Rarely do we see views in economics expressed as strongly as those of the pro-growth camp. Former MPC member, and academic economist Danny Blanchflower for example, tweets almost hourly on the subject referring to the Chancellor as “Slasher” and insulting those on the other side of the argument in a most unacademic fashion.

While there are those on both sides of the issue who seem remarkably sure of their position, I personally have always felt uncomfortably torn on it. I don’t think the choice facing the incoming coalition in 2010 was particularly easy – they either had to plunge the economy into recession by cutting borrowing as they did or they had to carry on borrowing a fifth of their total spending for several years just as the bond markets were at their most frazzled. Neither option could have looked very pleasant.

Of course things have changed since 2010 and the data has not been kind to the pro-austerity side of the debate. The IMF and quite a few economists who had been sympathetic to the early fiscal consolidation are beginning to change their mind. So in case you are as confused by it all as I am, I thought I might put in writing, the state of the argument as I see it this summer outlining some points where there is agreement or not.

 
#1 Austerity lowers short term growth
Probably the clearest point of all is that austerity has reduced our national income in the short term. Some said that by cutting the deficit we would get an economic expansion. It didn’t happen and was probably never going to.

It wouldn’t be right to assume that UK recession is only down to the coalition’s fiscal policy of course. The huge surge in commodity prices in 2011 had a large effect too (it pushed up prices and acted rather like a tax on consumers); the weakness of the eurozone removed one pillar of a potential UK recovery; and the threat hanging over the whole banking system from the eurozone crisis has probably also restrained lending and exacerbated the downturn.

But true as all these excuses are, austerity has undoubtedly cost us some GDP. We don’t need to get into a debate over the exact figures; the story is there for all to see.

For many, that appears to be the end of the debate. If growth is good, then less growth is bad; austerity causes less growth so we should have less austerity. Simples.

That is the way the argument against the Chancellor is often written up. Alas, it is not quite that simple. Which brings me to proposition number 2.

 
#2 There is a trade-off between growth now and growth later
A defence of austerity – even if it is killing off growth this year – is that if we don’t have it now, we probably need to have it later. So while it is tempting to delay fiscal contraction to stimulate the economy this year and next, that comes at the cost of growth further down the line.

Some light has been thrown on this trade-off by some sensible projections (made by economists supportive of fiscal loosening) using the model of the National Institute for Economics and Social Research. (You will find the relevant paper here). They’ve looked at a scenario following the current government policy, and an alternative of waiting to 2014 to tighten fiscal policy. The paper suggests that if the government had waited, we could have avoided the double-dip recession, we would have enjoyed growth of 1.1 per cent this year and 2 per cent next year.

The cost of delaying the fiscal pain though, is that compared to George Osborne’s policy, you get lower growth rates from 2016 to 2021. By 2019, the George Osborne economy is actually bigger than the delayed-pain one, and it has a lower debt burden too on these projections.

Given that the idea of a short term pain versus long term pain trade-off is accepted by both sides in the debate, the question on which the whole issue hinges is not whether we lose growth now, it is whether we lose more growth now than we would in the future if we delayed. That is the issue that really matters.

 
#3 It all comes down to the fiscal multiplier
To make a judgement on whether short term pain is worse than long term pain or not, we can’t escape the concept of the fiscal multiplier. This is simply the amount of shrinkage you get (or growth) from a £1 cut in government borrowing (or increase).

There seems to be some acceptance on all sides that in normal times you might expect the fiscal multiplier to be about 0.5. Taking 1 per cent of national income off government borrowing, knocks half a per cent off growth.

If that fiscal multiplier was constant at all times, then it may not much matter when you do a fiscal consolidation – the cost will be the same in terms of lost national income.

The problem for George Osborne is that the evidence is stacking up that the multiplier is not constant at all times. It seems to be higher when the economy is depressed than it is in normal times. When the economy is in recession or depression, a cut appears to be more damaging than when it is plodding along comfortably. Logic would dictate that you should do the fiscal tightening when the impact is smallest – which would be during a recovery (or even better, during a boom if you can wait for one to come along) not during a recession.

I won’t go into detail on why the multiplier might change as the economy swings from recession to boom but there are several reasons. Monetary policy is weaker in a recessionary economy, and struggles to offset the depressing effect of fiscal contraction so can’t do its bit to ease the pain. At the same time, more households are constrained by an inability to borrow money in recession, so can’t maintain spending in face of the shock.

The study that is most horrific for the George Osborne side of the argument on this is a recent technical working paper from the IMF (which you can find here) which suggests that the loss of GDP from a fiscal contraction during a recession is much larger than that of a contraction in normal times. “Spending multipliers in recessions are
up to 10 times larger than spending multipliers when economies are expanding” it says.

The paper not only appears to contradict the IMF’s usual thinking on these matters, but it does so in two important ways – firstly it implies you wait for the good times to come before cutting borrowing. And secondly it also suggests that any consolidation that is imposed during a recession should come in the form of tax rises and benefit cuts rather than cuts in government services.

The economists who have made the specific projections for the UK that I referred to earlier, follow the thinking of that IMF paper (if not the numbers) and they come to the view that even though George Osborne gets more growth in the late part of the decade, and ends up with less debt and a bigger economy in 2021, the upfront pain is simply not worth it. They think that GDP over the whole current decade is about £239 billion smaller than it would be by delaying the austerity pain until 2014.

But it is that claim that is really at the centre of the argument on fiscal consolidation now or later. Do you believe the variable multiplier story? And how much weight do you put on those rosy future scenarios as opposed to the obvious damage being done to the economy now by austerity?

 
#4 Extra capital or infrastructure spending now may minimise the sacrifice later
For many of the economists lining up in favour of some kind of an alternative to the current strategy, the most popular option appears to be borrowing extra money now in order to invest it in new capital projects. You could for example, spend it on infrastructure or new houses, as opposed to borrowing for unsustainable tax cuts.

You can see why this might be attractive: capital spending appears to offer a route round the problem that getting extra growth now comes at the cost of growth later.

One reason for this is that infrastructure may have positive supply-side effects (it may offer us better transport, shorter journey times and a more competitive economy for example, allowing GDP to grow faster than otherwise).

A second reason is that infrastructure spending is generally reckoned to have a very high multiplier, so you get a lot of extra GDP from the extra spending you do.

And thirdly, capital spending creates assets as well as liabilities so a government would have something to show for its spending in future years, making any legacy debt far less problematic. If a government built houses for example, it might even improve its long term debt position by selling them at a profit, thus reducing the need for future austerity a little.

Given that there is a lot of useful infrastructure and housing to build in the UK, we are probably going to have spend money on it anyway and there is surely no better time to do so than when the economy is flat and construction workers have nothing else to do.

There are also tactical reasons for thinking this is a route to pursue. It is consistent with George Osborne’s most important fiscal target (that the cyclically adjusted current deficit should be eradicated); and it is politically attractive as it was not George Osborne that decided to halve the capital budget in the first place, but Chancellor Alistair Darling. In that respect, it represents less of a credibility-destroying U-turn than any other option.

One argument against infrastructure spending is that it takes a long time to turn the tap on. There are not that many shovel ready projects the builders cans tart on. This might be seen as a disadvantage, but it is worth warning that our economy might still be flatlining in two years time; who knows? It would be regrettable if we hadn’t made some preparations ahead of time.

Given that the arguments around extra capital spending are so different to those for extra current spending or tax cuts, it surprises me that the distinction isn’t drawn more clearly in the many words spoken about a fiscal boost.

I hope this romp through some of the arguments clarifies the issue. At least, it might explain why there is division on it.

For my own money, I worry that whatever policy we pursue, it is going to be tough for quite a few years. You can’t assume the economy will be in a strong recovery soon, either with or without a stimulus. The fear is that we face an unpleasant catch-22: that the economy won’t get sustainable growth until the government’s and households’ debts have come down, and that we won’t get those debts down until we have sustainable growth.