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How to make sure the budget secures the investment Britain needs

  • Written by Linda Yueh, Fellow in Economics/Adjunct Professor of Economics, University of Oxford
How to make sure the budget secures the investment Britain needs

Prime Minister Keir Starmer has promised to[1] “rip out the bureaucracy that blocks investment” in the UK. He was speaking at his government’s first international investment summit, an attempt to encourage the finance and business worlds to put more money into the country.

But the government will need much more investment – by both the private and public sectors – than can be drummed up with one summit and an intent to slash red tape if it is to meet its economic goals. So Labour’s upcoming first budget on October 30 presents a vital opportunity to lay the foundations for an investment boost over the coming years.

A major, long-term aim is to get the UK’s annual growth back to its pre-2008 banking crisis rate, when it was around 2%[2] a year. The UK has been growing at about half that rate since then.

This slower economic growth has damaged people’s living standards as well as the tax receipts the government needs to fund public services, particularly since the pressures of the COVID pandemic.

Slow growth could be turned around by increasing investment in things like infrastructure. The UK has lagged behind comparable economies in this regard – it has had the lowest rate of investment[3] in the G7 group of major economies for 24 of the last 30 years.

Last year, the UK’s GDP per capita[4] (a measure of the average income) was nearly £11,000 lower[5] than it would have been had the economy continued to grow at its pre-2008 rate.

Rather unusually, despite the UK’s debt recently reaching 100% of GDP[6] – the highest amount in more than half a century – the usually fiscally conservative International Monetary Fund (IMF) has said the UK should consider focusing on investment. This, it says, could potentially boost GDP growth and thus stabilise the debt-to-GDP ratio[7].

And the UK’s spending watchdog, the Office for Budget Responsibility (OBR), believes it is possible to raise economic growth through more investment. The OBR estimates[8] that a sustained 1% of GDP increase in public investment could increase the level of potential national output by just under 0.5% after five years, and around 2.5% in 50 years.

So, there will undoubtedly be a number of investment measures in the Budget. But how many depends, in part, on whether the chancellor, Rachel Reeves, revises some restrictions on borrowing, known as the fiscal rules. There could be adjustments such as offsetting government debt with its assets, including student loans. Reeves is reportedly looking at this possibility – which could create as much as £50 billion[9] of additional fiscal headroom.

Read more: The chancellor has tied her own hands with her fiscal rules – here's why she should change them[10]

She could also re-institute the previous Labour government’s golden rule: only borrow to invest. This could separate out capital investment (spending on things like roads and other infrastructure), which is needed to support long-term growth, from day-to-day spending on public services. It would also increase the transparency of what the borrowing is for, and whether it can deliver growth that can help stabilise the debt-to-GDP ratio.

These changes would prevent public investment from being cut in order to meet one of the current fiscal rules Reeves is adhering to. That is, that debt must be falling as a percentage of GDP over a rolling five-year period. As it stands, this rule restricts how much Reeves can borrow – even if that is what the country needs to grow economically.

A change to this rule could help the government fund its two new initiatives to promote public investment: the National Wealth Fund[11], which requires just over £7 billion over the parliament, and GB Energy[12], which needs about £8 billion.

Investments in the National Wealth Fund and GB Energy could further raise economic growth by “crowding in”[13] private investment. For example, investing in infrastructure like a road entices private firms to invest too, perhaps in new premises or more staff, because a better transport link will make these firms’ investments more profitable.

The government’s aim is to bring in three times the public investment in the National Wealth Fund to invest in infrastructure and key sectors. GB Energy likewise intends to bring in private investors to support the green transition that can generate new output and jobs.

But targeting growth will take more than just finding the money. It also requires a regulatory approach and planning system that generates confidence among private investors to put their money in alongside the government.

The impending Budget won’t set out all of the details that investors are looking for, but they will expect to see the growth strategy and assess whether it is credible. For instance, successive governments have struggled with planning reform, so investors will be justified in wondering what will be different this time.

UK chancellor Rachel Reeves in Downing Street
Rachel Reeves could potentially give herself an extra £50 billion to spend if she changes the fiscal rules. Fred Duval/Shutterstock[14]

Investors will also be on the lookout for a more certain regulatory regime over several years. The main impediments to investment tend to be uncertainty, including over regulation and planning, as well as being able to find workers with the right skills. This Budget is an opportunity to set out what the government plans to do in both areas over its five-year parliament.

One positive signal to investors would be if the Budget sets out a broad definition of “capital”. For physical capital like a factory to be properly used, it requires people (human capital). And we hear a lot about green assets and digital assets, which essentially means that capital can be physical, human or green, as well as digital.

By outlining its policies around infrastructure and skills, as well as its environmental and digital policies, any proposed growth strategy would be more holistic and likelier to have a positive impact on growth.

But the difference between a strategy and a great strategy is in its execution. The Budget will almost certainly set out various fiscal policies to support growth. But the ability to deliver this strategy will determine whether it is truly a budget for growth.

References

  1. ^ has promised to (www.theguardian.com)
  2. ^ around 2% (ifs.org.uk)
  3. ^ lowest rate of investment (www.theguardian.com)
  4. ^ GDP per capita (www.worldometers.info)
  5. ^ £11,000 lower (ifs.org.uk)
  6. ^ 100% of GDP (www.ons.gov.uk)
  7. ^ stabilise the debt-to-GDP ratio (www.imf.org)
  8. ^ OBR estimates (obr.uk)
  9. ^ £50 billion (www.thetimes.com)
  10. ^ The chancellor has tied her own hands with her fiscal rules – here's why she should change them (theconversation.com)
  11. ^ National Wealth Fund (theconversation.com)
  12. ^ GB Energy (theconversation.com)
  13. ^ “crowding in” (www.economicshelp.org)
  14. ^ Fred Duval/Shutterstock (www.shutterstock.com)

Read more https://theconversation.com/how-to-make-sure-the-budget-secures-the-investment-britain-needs-241074

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