The 'inconvenient truth' calls for investment reform to "level up" and reach zero carbon

The Government's "levelling up" agenda faces its first major test on 11 March with the publication of the Budget. However, levelling up the national economy is not the Government's only flagship policy commitment. The UK's legal commitment to reach zero carbon by 2050 – under increased scrutiny following the recent Heathrow expansion ruling on climate grounds, together with the need to tackle long-term economic challenges such as an ageing society, create a conundrum of major spending pressures for the Government.

The Government has committed to increase investment in infrastructure by £100 billion, and the immediate question for the Budget is, how will it be spent? However, a longer term issue for Government is the level of investment needed to truly level up the national economy, without hampering London's economic performance, and ensure that all of this is 'clean growth'. This will require far greater levels of investment than currently planned, which will need to be sustained over future decades.

Added to all of this is the challenge posed by the Government's fiscal rules, which requires the Chancellor to balance the current budget by 2023. This provides very little headroom for increasing day-to-day spending without raising taxes. But over the long-term it could also put a brake on government investment in infrastructure. Not only does the Government need to fund the future operating costs associated with running new infrastructure, it also needs to cover the depreciation and interest costs associated with borrowing for investment. In the longer-term, there are also questions over the sustainability of certain elements of the UK tax base – not least fuel duty receipts in a low carbon economy, and of course, the economic uncertainties of Brexit.

Therefore the real question post-Budget should be: how do we sustain a step-up in infrastructure investment in a way that is affordable for government and 'fair' for the UK taxpayer over the long-term?

The imbalance between the North and the South currently stands at almost £6,000 per person (circa 20%) when comparing the North's performance with the rest of the UK, on a Gross Value Added per capita basis. This gap in economic performance has persisted for the last 30 years, and is largely attributed to differences in productivity. The sub-national transport body, Transport for the North, suggests the gap between the North and the country as a whole (excluding London) is set to rise to 33% by 2050 under historic trends of investment. However, to date the Government has not indicated what extent of levelling up is "good enough". In contrast, for its zero carbon agenda, the Government has very clear targets through to 2050, informed by independent evidence from the Committee on Climate Change on the need for, and feasibility and affordability of, a national target.

If the Government had a similar target for levelling up, which made the costs of achieving it transparent, this would open up a constructive debate about how to pay for it at both a national and local level. This debate should consider a new fiscal approach which taps into the windfall gains for the broad range of beneficiaries of investment in public infrastructure – and in particular strategic transport programmes, which, if well-designed, provide productivity gains to the local and national economy, this includes land and property owners as part of the 'Land Value Capture'. There are, however, windfall gains to a much broader range of local beneficiaries, including businesses (increased profits from improved access to their markets) and residents (increased wages from better career opportunities), and of course the users of the infrastructure (quicker and more convenient journeys).

.. Arguably the more broadly based the funding strategy, the more likely that different private parties are 'paying their way' and the fairer the costs to the UK taxpayer. Implementing this approach, however, involves difficult political and practical reforms. It requires local areas using enhanced and new powers that allow them to introduce new charges and taxes, as well as national reform to reconfigure the UK tax base. Any new 'value capture'–based funding approaches also need to be well designed, so that they are effective in targeting private windfall gains and do not price off the economic growth that will level up the country.

The review of HM Treasury's 'Green Book', the Government's framework for public authorities in judging whether spending represents 'Value for Money' to the taxpayer, will also be critical for informing decisions over how to distribute increased levels of investment across the country, and ensuring city regions' programmes make maximum contribution to the levelling up agenda. This requires clarity nationally and locally on how we quantify and value the economic benefits of levelling up, and breaking down the silos of current appraisal approaches across Government departments

This is not a completely new approach. The largest city region transport programmes delivered over the last decade have been in London and Greater Manchester, which were made possible by substantial local funding contributions, using the limited powers they had available, in return for increased levels of government funding. These investment programmes were also underpinned by business cases which made use of more "novel" approaches to valuing the economic benefits of intervention.

The National Infrastructure Commission (NIC) recommended a new funding approach in its 2018 National Infrastructure Assessment – suggesting local areas should contribute at least 25% of the costs of major transport investment in return for increased levels of government funding. However the NIC stopped short of identifying how local areas would raise this funding under their existing powers. The Government was due to respond to the NIC alongside the Budget with its long-awaited National Infrastructure Strategy, but has now delayed this to May, presumably to take stock of the implications of its plans for decarbonisation and levelling up.

The extent of reform required will clearly take time, and certainly won't be resolved in the Budget or the Government's National Infrastructure Strategy later this spring. However, the inconvenient truth is that tough reform will be required if we are going to level up our national economy as well as transition to zero carbon by 2050. The Government has an opportunity to set a direction of travel in its devolution White Paper and through this year's Spending Review. This should consider: increased devolution to enable local areas to raise their own funding for infrastructure investment; appropriate levels of match-funding from Government to incentivise local areas to make best use of their new powers; and a set of rules which operate nationally to support roll-out to different parts of the country and sustain increased investment levels over the long term. The Government intends to publish the conclusions of the Spending Review alongside the Autumn Budget, but the work across Whitehall and between local and central government to kick-start reform needs to start now.