Written evidence from the Department for
Transport (TE 105)
SUMMARY
This memorandum sets out the Department's response
to the questions asked by the Transport Select Committee in their
inquiry into transport and the economy. It is organised around
the Committee's specific questions.
The memorandum concludes that although economic conditions
have changed since the 2006 Eddington Transport Study, the fundamental
relationships between transport spending and UK economic growth
have not. It explains how the Spending Review process determined
future transport investment priorities on the basis of a broad
assessment of their impact but with a focus on sustainable economic
growth. It describes how reform of the way decisions are made
will continue to improve the Department's assessment of proposed
transport schemes. Finally, it notes that local authorities remain
responsible for planning transport priorities and interventions
in their areas.
INTRODUCTION
1. The Government believes that a modern
sustainable transport infrastructure is essential for a dynamic
and entrepreneurial economy, and improves people's quality of
life. Transport networks facilitate employment and ensure consumers
and businesses can access a wide range of markets, products and
services in the UK and overseas.
2. Given its pivotal role as a facilitator
of economic activity, the efficiency of the transport network
is a crucial determinant of productivity, and hence economic growth.
Investment in transport infrastructure and maintenance demonstrates
strong economic returns and is supported by the business community.
At a time of constraint in public expenditure, the Government
is prioritising spending on areas that maximise sustainable economic
growth. These spending decisions are complemented by policies
which seek to alleviate transport's negative impacts on, for example,
road congestion, noise and emissions.
Question one: have the UK's economic conditions
materially changed since the Eddington Transport Study and, if
so, does this affect the relationship between transport spending
and UK economic growth?
3. This section describes the change in
the economic conditions and the impact of these on Government
priorities and traffic growth. It then examines the links the
Eddington Transport Study found between transport spending and
UK economic growth, and assesses whether these are affected by
this change. It finds that economic conditions in the UK have
changed since 2006, precipitated by the global financial crisis
and the subsequent recession but this has not changed the fundamental
relationships between well-judged transport investment and economic
growth.
4. The UK's economic conditions are considerably
less favourable now than in 2006. The global financial crisis
triggered lower rates of growth and higher unemployment and the
largest recession in Britain's peacetime history. Growth in 2006
was strong at 2.8%.[102]
Following a fall of 4.9% in 2009, the OBR's Budget economic forecast
is for a gradual recovery with growth of 1.2% in 2010,[103]
as the legacy of unbalanced growth and excessive levels of debt
continue to weigh on the economic outlook.
5. The Government has stated that the most
urgent task facing the country is to implement an accelerated
plan to reduce the budget deficit, with the contribution being
mainly from reduced spending rather than increased taxes. Restoring
confidence in fiscal policy and acting quickly to tackle the deficit
are prerequisites for sustained economic growth.[104]
6. Traffic growth has slowed since 2008,
mainly due to the recession, resulting in less congestion than
there would otherwise have been. However, transport investment
today influences the growth potential of the economy decades into
the future. The demand for transport has tended to rise with economic
growth, partly because some of the underlying drivers are the
same (eg population growth, resource productivity) and partly
because a more vibrant economy with more affluent individuals
tends to lead to more transport services being consumed, all other
things equal. This suggests that as the economy regains momentum,
so too will the demand for transport, which in turn means a continued
need to manage it effectively and efficiently.
7. The 2006 Eddington Study[105]
concluded that the exact nature of the relationship between transport
spending and UK economic growth is complex and multi-faceted.
Eddington explored the transmission mechanisms ("microeconomic
drivers") by which transport spending increases productivity
and thus economic growth. This note groups these into five: business
efficiency; investment and innovation; agglomeration economies;
labour markets; and competition, trade, and globally mobile activity.
In order to determine whether current economic conditions are
affecting the relationship between transport investment and economic
growth, the remainder of this section will examine them in turn
and assess whether and how they may have changed.
8. Transport investment that improves business
efficiency directly increases productivity by enabling firms to
produce more output with the same resources. For example, improved
journey times or better ambience for business travellers increases
time available for productive work. Improvements to journey reliability
can have a similar effect by reducing the need to allow additional
time for delays. This may allow more deliveries to be made by
the same van. Reliability improvements also enable firms to hold
less stock leading to further efficiency gains. These efficiencies
will benefit economic growth under any economic conditions.
9. Well-targeted spending on transport supports
business investment and innovation, for example through infrastructure
investment that increases the capacity of the transport system
attracting businesses to locate in the UK. The other factors above
and below, which contribute to productivity, also encourage expansion
and investment by businesses. This relationship holds under any
economic conditions.
10. Agglomeration economies are the additional
productivity benefits that can be generated by firms being close
to each other and interacting, for example from knowledge sharing
or having access to a pool of specialised labour. Transport investments
can bring about agglomeration economies by bringing firms closer
(either in space or time) to other firms and workers operating
in the same sector. Where these agglomeration impacts occur, they
will improve productivity at any stage in the economic cycle.
11. Transport improvements can improve labour
market efficiency. Transport increases firms' access to pools
of labour providing an efficient match between jobs and workers;
in turn, workers are able to live in locations that best suit
their lifestyles and commute to jobs that closely match their
skills. This matching increases the productivity of each worker
in all economic conditions.
12. Transport improvements or reductions in commuting
costs can help unemployed people to gain employment.[106]
Unemployment is currently higher than during the Eddington study:
in December 2006, when the study was published, the rate of unemployment
was 5.6%, while in the three months to July 2010 it was 8.0%.[107]
The labour market impacts from transport spending therefore continue
to be important. As local labour markets recover at different
speeds, the ability to travel easily to where employment is growing
helps improve labour market efficiency, supporting economic growth.
13. Appropriately targeted transport investment
can support competition, trade, and globally mobile activities.
A mature transport system allows firms to reach larger domestic
and foreign markets and increase production. This can reduce costs
through bulk-buying, employing specialised staff and spreading
fixed costs over more output, for instance. Greater connectivity
of product and service markets exposes UK firms to more global
competition which can spur efficiency gains and innovation domestically.
Globalisation also gives consumers access to a wider variety of
goods while international networks support tourism. In order to
meet the challenge of globalisation and the intense competition
that it brings, a modern and efficient transport infrastructure
is essential not just to remain competitive but in order to attract
inward investment from overseas.[108]
14. The assessment above suggests that whilst
different economic conditions may lead to short-term variations
in the scale of the relationship between transport investment
and economic growth, the underlying linkages remain. The fundamental
relationship between transport investment and growth therefore
remains consistent with the Eddington Study's findings.
Question two: what type of transport spending
should be prioritised, in the context of an overall spending reduction,
in order best to support regional and national economic growth?
15. The Government is committed to reducing the
deficit, facilitating long-term, sustainable growth and tackling
carbon emissions. In the Budget, the Chancellor pledged to make
the tough choices that will allow us to maintain investment in
new and existing infrastructure that will support a growing economy,
while eliminating the structural deficit over the lifetime of
the Parliament.
16. The Department's Spending Review settlement
is based on cutting waste and taking hard decisions about priorities
that have allowed us to secure the investment in vital transport
infrastructure that will support the national economic recovery.
In the context of an overall reduction in spending by 15% in real
terms, there have been tough choices on improving efficiency,
refocusing lower priority programmes and raising revenue. Investment
has been secured in rail (£18 billion), Highways Agency major
projects, capital maintenance and enhancements (£4 billion)
and local transport major projects, capital maintenance and enhancements
(£6 billion) alongside funding for a further tranche of PFI
projects and to ensure the Tube upgrades will go ahead.
Further details are available on the Department's
web site and a copy of the press release is attached.
Question three: how should the balance between
revenue and capital expenditure be altered?
17. The Spending Review Guidance published by
HM Treasury in June 2010[109]
set out the process for how resource and capital would be allocated
to departments and the results of this process have now been published,
as described under question two.
18. The Spending Review process considered the
priorities for government expenditure, examining both revenue
and capital expenditure. For revenue spending, all departments
are being asked to contribute to the deficit reduction. The Spending
Review process allocated capital according to a bottom-up appraisal
methodology, to identify the areas of spending that will achieve
the greatest economic returns. The Department worked closely with
HM Treasury to prioritise capital transport projects and programmes,
according to analysis of their costs and benefits, and their contribution
to Government priorities. The capital settlement the Department
received reflects the important role transport can play in supporting
economic recovery and in creating opportunities which are spread
across the country.
Question four: are the current methods for assessing
proposed transport schemes satisfactory?
19. Decisions on transport schemes are taken
on the basis of a range of factors, including the strategic fit
with the Government's objectives, economic costs and benefits,
value for money, affordability and deliverability. In terms of
the methods used for assessing proposed transport schemes, the
appraisal process is vital to developing advice for ministers
to take decisions based on the best available evidence. Given
the multitude of considerations that are important, an element
of judgement in decision making is inevitable and necessary.
20. The Department uses NATA (the New Approach
To Appraisal) as the standard tool for assessing the expected
impacts of transport investments.[110]
It is based on HM Treasury's "Green Book" methodology
for economic appraisal.[111]
NATA draws together best practice in transport analysis, with
projections from other Departments such as the values for monetising
costs from carbon emissions (DECC), economic growth (HMT), and
oil price forecasts (DECC), to provide the evidence for well-informed
decision-making. NATA was reviewed in 2008 following the Stern
Review and the Eddington Transport Study and the supporting evidence
is kept under constant review and refreshed regularly.
21. The Government has committed to reform the
way decisions are made on which transport projects to prioritise,
so that the benefits of low carbon proposals (including light
rail schemes) are fully recognised.[112]
Spending Review decisions have been based on the priorities set
out in the Coalition Programme for Government and informed by
updated carbon values and the HM Treasury methodology used by
all departments to assess value for money in a consistent way.
Building on this, wider work is underway and the Department intends
to introduce reformed decision-making procedures for new projects
as soon as possible. At that point, projects seeking final approval
will be expected to adhere to the new procedures.
Question five: how will schemes be planned in
the absence of regional bodies and following the revocation and
abolition of regional spatial strategies?
22. Local authorities remain responsible for
planning transport priorities and interventions in their areas.
Decisions about the available levels of Government funding to
meet those ambitions have been taken as part of the Spending Review,
as described under question two. Some schemes were announced as
part of the Spending Review; the process for allocating money
to local schemes will be announced shortly. The Department will
also be looking to develop successor arrangements to the Regional
Funding Allocations for transport that, over time, give a proper
voice in scheme prioritisation to elected local authorities and
business interests. We hope that Local Enterprise Partnerships
will have an important role in this.
CONCLUSION
23. At a time of constraint in public spending,
the Government is targeting investment in areas which support
economic growth, alongside driving out procurement inefficiencies.
Further work to reform the way decisions are made on prioritising
transport projects will build on the Department's robust methods
of assessment, to help ensure maximum impact from transport spending.
October 2010
102 ONS, Gross Domestic Product: chained volume measure,
seasonally adjusted (series ABMI). Back
103
Budget 2010, HM Treasury, TSO, June 2010. Back
104
Ibid. Back
105
The Eddington Transport Study, HM Treasury and Department for
Transport, TSO, December 2006. Back
106
Making the Connections: Final Report on Transport and Social Exclusion,
Social Exclusion Unit, 2003. Back
107
ONS, ILO Unemployment Rate for age 16-64 (series LF2Q), UK. Back
108
Cushman and Wakefield (2006) found the top three factors which
were "absolutely essential" to European senior executives
for business location were: easy access to markets, customers
and clients; availability of qualified staff; transport links
with other cities and internationally. As well as being directly
identified as the third factor, transport is a crucial determinant
of the first two priorities. Back
109
The Spending Review framework, HM Treasury, June 2010. Back
110
http://www.dft.gov.uk/webtag/ Back
111
The Green Book: Appraisal and Evaluation in Central Government,
HM Treasury, http://www.hm-treasury.gov.uk/d/green_book_complete.pdf
Back
112
The Coalition: our programme for government, May 2010. Back
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