Government spending plans not enough to stop falling public investment | Money News
The chancellor will need to spend an extra £20bn by the end of the parliament to maintain public investment at its present levels.
Rachel Reeves has promised to unveil a “budget for investment” next week, while reversing the “years of underinvestment” overseen by the previous Conservative government.
However, this would involve taking on billions of pounds of fresh debt if, as is widely expected, the government chooses to borrow more to invest.
Under plans inherited by the previous government, public investment as a share of national income (excluding student loans) was due to hit 2.1% of GDP at the end of this financial year before falling sharply during the rest of the parliament.
In its manifesto, Labour outlined an extra £5bn of investment plans.
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However, this is not sufficient to reverse the downward trend and would see public investment as a share of GDP settle at 1.6% by the end of the parliament.
Earlier this month, the government also pledged an additional £22bn for carbon capture but said it would be delivered over a 25-year timeline, so it has not been included in the analysis.
In order to maintain public investment as a share of national income at its 25-year average of 1.7% of GDP, the government would have to borrow an extra £10bn.
It would involve an additional £20bn to maintain it at its present levels (2.1% of GDP), according to economists at the Institute for Fiscal Studies (IFS).
What counts as investment?
Government investment can be wide-ranging.
It includes building new schools, buying new NHS equipment and spending on building new roads and railways. Britain has a shaky track record when it comes to delivering these types of projects.
Low comparative investment
Analysis by the Institute for Public Policy Research (IPPR) thinktank shows that public investment in the UK remains below average within the G7 club of advanced economies public investment.
Dr George Dibb, associate director at IPPR, said: “The UK has had chronically low levels of public investment since the 1970s, this has left us with crumbling infrastructure, out-of-date technology in our public services and undermined the foundations of our economy.
“Compared to other G7 economies we’ve never even been average.”
“Rachel Reeves has the chance to turn this around, however she needs to grapple with severe cuts to public investment locked in by the previous government,” he added.
The picture is even worse when business investment is included in the analysis – Britain languishes at the bottom of the table.
The chancellor said she is prepared to borrow more to fund this type of investment spending, something she believes is a critical part of her mission to deliver more economic growth.
In her conference speech in September, she said: “We find ourselves at the very bottom of the G7 league table for economy-wide investment as a share of our GDP. And we must change that.”
Reeves tweaked her self-imposed fiscal rules – which required debt to be falling as a share of GDP by the fifth year of the parliament – in order to manage this extra borrowing.
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How to invest more
Economists have long argued that the current system prevents governments from making long-term investments that could grow the economy.
One option under consideration is to instead target “public sector net worth”, which takes into account the government’s assets – such as hospitals, schools and its student loan book – as well as its liabilities.
This gives a broader view of the government’s fiscal position and could unlock more than £50bn in additional headroom, giving the chancellor sufficient space to overturn the downward trend in public investment.
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However, this change would not impact the government’s ability to service its debt and economists have warned the chancellor against using up all of that extra headroom in case it triggers a perverse reaction in the bond markets.
With public sector net debt at its highest level relative to GDP since the early 1960s, the IFS said that such a move could trigger a buyer’s strike in the bond markets.
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