The fiscal stimulus for transport - has it worked?

No, argues Richard Wellings in Transportation Professional

The government’s fiscal stimulus may well have benefited some transport users but it is highly doubtful that it has contributed to economic recovery.

As part of the government’s Keynesian spending spree, the money to pay for it has been borrowed, thereby contributing to Britain’s worst-ever peacetime fiscal crisis. The budget deficit is now at the highest level since World War II and its magnitude threatens long-term growth in the economy.

Government borrowing crowds out private sector activity by absorbing resources that would otherwise be available to businesses and individuals. It puts upward pressure on interest rates and in the long run risks high inflation if politicians decide to monetise the debt. Moreover, the expectation of higher taxes and higher interest rates and/or inflation tends to deter business investment.

While some of the schemes may help businesses increase their productivity by reducing congestion, it is difficult to assess whether they are economically viable in the absence of market-based pricing on the roads, and in the context of substantial subsidies for the railways. Indeed, to the extent that the rail element of the stimulus requires continuing taxpayer support, it is likely to hamper wealth creation.

Levels of congestion and international comparisons suggest that substantial transport investment is desperately needed in the UK. However, historical experience suggests that as long as expenditure is directed by politicians and bureaucrats – rather than responsive to consumer demand – it is likely to be squandered on wasteful, uneconomic schemes that add to the dead weight of public debt.

Dr Richard Wellings, Deputy Editorial Director, Institute of Economic Affairs.

Further reading:

The Railway, the Market and the Government by John Hibbs et al.

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