Transport and the Economy

Memorandum from Prof. Henry Overman (TE 16)

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?

1. Clearly the UK’s economic conditions have changed. GDP per capita is higher than when the Eddington report was written even if the growth rate is lower. There is no reason to think that these changes affect the relationship between transport investment and UK economic growth. The most important impacts of transport investments are long run and decisions should continue to be made on that basis. Equally the arguments that transport facilitates growth rather than causing it and that a lack of transport responsiveness may impede growth remain convincing. Finally, the emphasis on mode neutrality (e.g. not always favouring rail over planes) remains valid.

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?

2. The priorities for investment remain those identified by Eddington: Reducing congestion in urban areas, on key inter-urban corridors and at key international gateways (major ports and airports).

3. We should prioritise projects that deliver large benefits relative to costs. Assessments of these costs and benefits need to be realistic. Claims about the "transformational" nature of transport investments for particularly areas should be generally discounted in assessing these benefits because they have no convincing evidence base to support them.

4. Consistent with the findings of the Eddington review, and the points above, the case for large expenditure on a High Speed Network (including HS2) remain weak relative to the case for other schemes. Put simply, for the cost of the London-Birmingham HS2 link we could fund a scheme the size of Manchester’s Transport Innovation Fund Schemes bid in 10 of our best performing cities. There are good reasons to think that the benefits of the latter would far outweigh the former (even more so if planning reforms were to allow expansion of these cities). Moreover so long as electricity generation remains largely carbon based the global warming aspects of HSR are nugatory.

How should the balance between revenue and capital expenditure be altered?

5. Capital expenditure is likely to bear a disproportionate share of cuts even when the benefits to investment far outweigh the benefits to revenue expenditures that will be maintained (it is hard to cut subsidised bus services, easy to scrap plans for a new railway line). Evaluation of costs and benefits coupled with transparency may go some way to prevent this but the political economy pressures mean that this outcome is hard to avoid.

Are the current methods for assessing proposed transport schemes satisfactory?

6. Decisions will need to be made on specific projects within these overall priorities. The way that we do this should continue to be based around a careful assessment of the realistic costs and benefits. Traditionally this has been done on the basis of Cost-Benefit Analysis. More recently DfT has issued guidelines about incorporating wider economic impacts in to transport appraisal. There is a distinct possibility that this has added more uncertainty to estimates of benefits. Given our incomplete understanding of the wider impacts, moving even further away from CBA (e.g. towards estimates of "growth impacts") as a means of prioritising projects would be a high risk move without clear benefits. One improvement in current practice would be for ex-post assessment of the economic impacts of larger schemes.

7. It is unclear whether we are doing a good job of incorporating market signals in to transport planning and assessment. For example planners often to try to "lead the market" with investments whose value depends on changes in behaviour that are often not forthcoming (so we build in weakly performing areas rather than responding to congestion in more successful areas). These biases also occur in assessment, for example, valuing land at market price, but wages at national averages artificially reduces the appraised value of projects in urban areas.

8. Concerns about growth impacts would be better seen as a strategic issue determining overall spending priorities and, possibly, used to decide between projects that have otherwise similar CBAs.

How will schemes be planned in the absence of regional bodies and following the revocation and abolition of regional spatial strategies?

9. The case for moving away from RDAs and spatial strategies is strong but it will create problems for some transport decisions. For intra-urban schemes local authorities and local enterprise partnerships are the obvious planning bodies. This will raise questions around capacity (for smaller LAs and LEPs) and the extent to which LEP boundaries match up to those of the local economic area. For inter-urban and other large schemes that extend beyond LEP boundaries it would appear that the planning role will need to revert to central government. Strategic planning for projects that have wide spatial impacts are not easily devolved.

10. It should be noted that the move to abolish RSS before alternative arrangements are in place is likely to lead to considerable uncertainty (and hence delays) in implementing projects in the immediate period.

Prof Henry Overman acted as a one of the group of economists who advised the Eddington Report (the so called "friends") and now sits on the HS2 analytical challenge panel. He directs the BIS/CLG/ESRC/WAG funded Spatial Economics Research Centre. This submission presents his personal views and is not representative of any organisation.

· This evidence is submitted as the personal views of Prof. Henry Overman and not the view of the LSE.

September 2010