Before committing to large infrastructure projects such as railways, roads, or hospitals, the UK Treasury evaluates their costs and benefits to determine economic viability. Recent debate, particularly among Labour Party figures, questions whether these assessments fairly represent the broader value of investments, especially outside London. Previous chancellor Rachel Reeves revised Treasury guidance to ensure projects beyond the capital received more balanced consideration, emphasizing benefits that are difficult to quantify and cautioning officials against dismissing initiatives solely due to low benefit-cost ratios. Her successor, John Healey, has advocated for lowering the discount rate to increase the present value of long-term benefits. Combined with regional development proposals like Andy Burnham’s No 10 North, these efforts aim to channel investment beyond London’s economic core.

However, some economists suggest that the Treasury’s appraisal framework may systematically overstate the value of many projects by overlooking the wider economic costs associated with raising funds through taxation. While project evaluations often assume that tax revenues used to finance spending are neutral transfers, this perspective neglects so-called “deadweight losses” — economic inefficiencies resulting from tax-induced changes in behavior. Higher taxes can reduce work incentives, discourage investment, and limit mobility, leading to costs that exceed the revenue gained.

The Treasury’s Green Book acknowledges these distortions but instructs officials generally to exclude them from most appraisals. The reasoning is that departmental budgets are fixed, so the method of raising funds does not affect which projects are chosen, assuming the money must be spent regardless. Critics argue that this logic fails to consider that governments decide overall spending levels and could avoid economically harmful taxes by prioritizing fewer projects.

The deadweight cost of raising an additional pound in tax revenue has been extensively studied. Estimates vary, with research from 2006 placing the figure at around £1.26, and subsequent European Commission work and recent analyses suggesting it could be as high as £1.80 to £2.20 when accounting for broader economic responses including reduced private investment. These figures imply that projects with benefit-cost ratios below these thresholds may ultimately destroy economic value once tax impacts are factored in.

Examples cited include the A1 road upgrade from Dishforth to Leeming, which initially had a benefit-cost ratio of 1.40 but was later reassessed to 0.90, and rail projects such as East West Rail and Scotland’s Borders Railway, both scoring approximately 1.30 when including social benefits. Several major government initiatives including the New Hospital Programme, Affordable Homes Programme, and the smart meter rollout also fall into a similar range, with ratios that may not justify their costs when the economic burden of taxation is included.

Overall, the aggregated infrastructure pipeline shows a benefit-cost ratio of about 1.30, raising questions about whether the true economic returns of many large projects are overstated. While the Treasury faces accusations of being overly cautious with investments, some economists contend that its reluctance to fully incorporate the economic costs of funding may inadvertently bias appraisals toward approving less beneficial projects.