The Chancellor of the Exchequer, Rachel Reeves, faces a significant challenge. She needs to maintain public investment levels as government spending on projects continues to decline.
Need for Additional Funding
To keep public investment steady, the Chancellor must secure an extra £20 billion by the end of the parliamentary term. Reeves plans to unveil a “budget for investment” next week. This budget aims to reverse the years of underfunding that characterized the previous Conservative administration. However, it may require accruing billions in new debt since the government is expected to borrow more for these initiatives.
Projections for Public Investment
Under the previous administration’s guidelines, public investment, excluding student loans, was projected to reach 2.1% of GDP by the end of this fiscal year. Unfortunately, experts anticipate a sharp drop thereafter. Labour’s manifesto proposed an additional £5 billion for investment. However, this amount falls short of reversing the downward trend. Public investment is expected to stabilize at only 1.6% of GDP by the end of the parliamentary term.
To sustain public investment at its 25-year average of 1.7% of GDP, the government would need to borrow an additional £10 billion. Maintaining the current level at 2.1% of GDP would require £20 billion in extra borrowing, according to the Institute for Fiscal Studies (IFS).
Importance of Public Investment
Public investment includes a range of expenditures. This covers building new schools, purchasing NHS equipment, and constructing transportation infrastructure. Unfortunately, the UK has struggled with delivering these projects.
The Institute for Public Policy Research (IPPR) highlights that public investment levels in the UK remain below average compared to G7 nations. Dr. George Dibb from IPPR notes that the UK has experienced chronically low public investment since the 1970s. This trend has led to deteriorating infrastructure and outdated public service technology.
Chancellor’s Approach to Investment
Chancellor Reeves recognizes the need for increased borrowing to facilitate investment spending. She believes this is essential for stimulating economic growth. In her September conference speech, she pointed out that the UK ranks at the bottom of the G7 in overall investment as a percentage of GDP. She emphasizes the urgency for change.
New Debt Measures
To enhance investment, Reeves is likely to introduce a new measure of debt called “public sector net financial liabilities.” This measure provides a broader perspective on the government’s fiscal situation. It includes assets like hospitals and schools. By classifying some liabilities as assets, the government could create more borrowing capacity. This adjustment could unlock over £50 billion in extra leeway, allowing the Chancellor to address the decline in public investment.
While this shift could provide more room for investment, economists caution that it may not relieve the government’s debt servicing challenges. With public sector net debt at its highest level relative to GDP since the early 1960s, the IFS warns that overextending this new borrowing capacity could lead to negative repercussions in the bond markets.
