The Chancellor will need to spend an additional £20bn by the end of Parliament to keep public investment at current levels.
Rachel Reeves He promised to unveil an “investment budget” next week, reversing the “years of underinvestment” overseen by the previous budget. governor government.
However, this could involve taking on billions of pounds of new 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 scheduled to reach 2.1% of GDP at the end of this financial year before falling sharply over the rest of Parliament.
In its manifesto, Labor set out £5 billion worth of additional investment plans.
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However, this is not enough to reverse the downward trend and will result in public investment as a share of GDP stabilizing at 1.6% by the end of the Parliament session.
Earlier this month, the government also pledged an additional £22bn for carbon capture, but said it would be delivered over 25 years, so was not 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 must borrow an additional £10 billion.
This would require an additional £20 billion to maintain current levels (2.1% of GDP), according to economists at the Institute for Fiscal Studies (IFS).
What is considered an investment?
Government investment can be extensive.
This includes building new schools, buying new NHS equipment, and spending on building new roads and railways. Britain has a strong track record when it comes to delivering this type of project.
Low comparative investment
Analysis by the Institute for Public Policy Research (IPPR) shows that public investment in the UK remains below average within the G7 club of public investment in advanced economies.
Dr George Dibb, Associate Director at IPPR, said: “The UK has seen chronically low levels of public investment since the 1970s, and this has left us with crumbling infrastructure and outdated technology in our public services and undermined the foundations of our economy.
“Compared to other G7 economies, we were not at the average at all.”
He added: “Rachel Reeves has the opportunity to change this situation, but she needs to deal with the severe cuts in public investment imposed by the previous government.”
The picture gets worse when business investment is included in the analysis – Britain is at the bottom of the table.
The Chancellor has hinted that she is willing to borrow more to finance this type of investment spending, something she believes is an important part of her mission to achieve more economic growth.
Speaking at the conference in September, she said: “We find ourselves at the bottom of the G7 league table in terms of economy-wide investment as a share of our GDP. We have to change that.”
Reeves adjusted his self-imposed fiscal rules – which required debt as a share of GDP to fall by the fifth year of Parliament – to manage this additional borrowing.
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 instead to target “public sector net worth,” which takes into account a government’s assets — such as hospitals, schools, and its student loan history — as well as its liabilities.
This gives a broader view of the government’s financial position and could open up more than £50bn in additional space, giving the Chancellor enough room to reverse the downward trend in public investment.
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However, this change will not affect the government’s ability to service its debt, and economists have warned the finance minister not to use all this extra leverage in the event of a negative reaction in bond markets.
With net public sector debt at its highest level relative to GDP since the early 1960s, the IIF said such a move could lead to a buyers strike in bond markets.