Press reset to steady the economy

One of Philip Hammond's first pronouncements on being made Chancellor of the Exchequer in July was to signal that he was open to a "reset" of the economy if post EU referendum conditions demanded it.

Sterling has plummeted since the Brexit vote, and though economic growth has held up better than expected, economic forecasters have almost universally downgraded their predictions for growth over the next few years. And if economic turbulence was feared after Brexit, expect even more of a rollercoaster ride as the markets react to Donald Trump's victory in the US presidential election.

So what would a reset mean? There have been a number of clues. The May government confirmed it would abandon the target of running a budget surplus by 2020, as signalled by George Osborne immediately after the referendum.

This gives Mr Hammond room for a modest relaxation of the planned spending cuts. Strong hints have been emerging that he is prepared to use spending on infrastructure projects to provide a short-term fiscal stimulus to support the economy. Over the weekend the Treasury was reported as saying that transport and infrastructure will be "at the heart" of the statement. 

To provide an immediate stimulus to the economy would mean concentrating on smaller projects that can be put into effect quickly, and this chimes with comments from Transport Secretary Chris Grayling that a change in emphasis towards smaller-scale projects can be expected under his tenure at the DfT.

We've not heard the words "fiscal stimulus" much from ministers in recent years. But new analysis this month from the Institute for Fiscal Studies said there is a "good case for waiting before implementing any further fiscal tightening", continuing: "indeed, a well-targeted temporary fiscal stimulus might help the economy through a period of uncertainty". Current historically low interest rates make this a prudent course of action for the chancellor.

This suggests a positive outlook for transport. The Government has reaffirmed its commitment to the big projects (such as HS2 and Heathrow). But local transport spending has been hit severely in recent years, and a modest rebalancing towards rapidly deliverable local road and rail schemes alongside the megaprojects would be welcomed.

So weekend reports of £1.3bn for improving local roads and removing congestion pinch-points, as well as backing for the Oxford-Cambridge expressway proposed by the National Infrastructure Commission, seem to suggest a step in this direction. 

The chancellor's speech on Wednesday should also provide a concrete indication of the new government's attitude to devolution. After appearing lukewarm initially, Theresa May reaffirmed her support for the process, though perhaps without the same level of enthusiasm for the Northern Powerhouse and its ilk as George Osborne. With a growing head of steam developing behind proposals for Northern Powerhouse Rail/HS3, there will be eager expectations of an announcement on funding for, or acceleration of, this project.

There also seems no reason for the Government to back away from the five-year investment programmes for rail and road, where the greater certainty over investment plans has allowed greater efficiency in planning and execution. There is one caveat – in recent years transport has been looked on favourably by the Treasury because of a hard-won track record of bringing in projects on time and budget. So continuing cost escalations in Network Rail's electrification programme, leading to the announcement this week that several sections of the Great Western electrification project have been deferred – or scrapped – are a cause for concern.

Overall, though, the outlook for transport appears optimistic. In the prevailing economic circumstances, the message is that greater investment in smaller, immediately deliverable projects, alongside a continuing commitment to larger, longerterm programmes, are consistent with the Government's economic goals – and can help to stabilise the economy and boost investors' confidence during the current period of uncertainty.

Reference: Transport Times November 2016 Issue

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