A “much bolder approach” to public investment is needed to tackle the UK’s challenges, top economists tell the Chancellor

The group comprises:

• Lord Gus O’Donnell, Former Cabinet Secretary and Head of the UK Civil Service, Former Permanent Secretary of the Treasury
• Lord Jim O’Neill, Former Commercial Secretary to the Treasury, Honorary Chair of Economics at Manchester University, Former Chief Economist of Goldman Sachs and Chair of Goldman Sachs Asset Management
• Professor Mariana Mazzucato, Founding Director of the Institute for Innovation and Public Purpose, University College London
• Mohamed El-Erian, President of Queens’ College, Cambridge, Former Chief Executive of PIMCO
• Professor Sir Anton Muscatelli, Adam Smith Business School, University of Glasgow, Chair of the Royal Economic Society
• Professor Simon Wren-Lewis, Emeritus Professor of Economics, University of Oxford
• Professor Jonathan Portes Professor of Economics and Public Policy, King’s College London, Former Chief Economist of the Department for Work and Pensions and the Cabinet Office, Former Director of the National Institute for Economic and Social Research (NIESR)

In the letter, which has been published today in the Times, the economists argue that a persistent investment gap has “held back growth and prosperity for over a decade”. And while the £113 billion of additional capital investment announced since last year’s Budget is a “useful step in the right direction”, this still leaves public investment flat as a share of GDP over the course of this Parliament – and substantially lower than both the OECD and the UK’s own post-war averages. 

A “much bolder approach” is required to meet the structural challenges the UK faces, according to the group. But they say this is hampered by a fiscal policy debate that instead focuses unhelpfully on “whether or not the government can hit arbitrary, short-term targets determined by highly volatile forecasts.”

They advise the Chancellor that now is the time to ramp up investment in the priorities identified in the Government’s missions, Industrial Strategy and 10 year Infrastructure Plan. One way of doing so would be to make more use of the opportunities to increase investment created by last year’s move to a debt rule based on public sector net financial liabilities (PSNFL). 

Acknowledging the need for the Chancellor to find additional tax revenue at the upcoming Budget, the group notes that progressive, pro-growth options are available “if the government is willing to undertake more fundamental reforms to the tax system.” 

They suggest that the government should focus in particular on rebalancing the tax and pensions system so that better-off older people, especially those with substantial property and pension wealth, “make a much larger contribution to addressing the fiscal pressures” arising from increased NHS, social care and pensions spending. These and other pressures on public spending must be managed in a more sustainable way, they say. 

The economists also advise the Chancellor to adopt the IMF’s recommendations for the UK’s fiscal framework, including moving to one fiscal forecast a year to minimise volatility.  Pro-investment reforms to the framework such as “requiring governments to address long-term risks, like climate change, at fiscal events”, “could also boost fiscal credibility”. 

Louis Willis, Director of the Invest in Britain campaign, which organised the letter, said:

“The government has rightly placed public investment at the heart of its economic narrative. But what has already been announced is far from sufficient to properly tackle the UK’s deep-rooted problems, kickstart growth, and meet voters’ expectations. 

“Fiscal policy isn’t an end in itself: its purpose is to deliver changes that improve both the fabric of our country and the lives of the people who live in it. The Chancellor must use the Budget as an opportunity to invest in Britain’s future, not treat it as an exercise in short-term book-keeping.” 

ENDS

Notes to editors

1. A copy of the letter and a full list of signatories can be viewed here.
2. Professor Jonathan Portes, one of the letter signatories, is available for media interviews and comment.
3. For further information please contact Patrick Calver, Head of Strategic Communications at the Economic Change Unit (ECU) E: patrick@econchange.org // M: (+44) 7972423881
4. Invest in Britain is calling on politicians to focus on the long-term interests of the country by delivering a substantial uplift in public investment in public services, clean energy infrastructure, and just transition to good jobs in greener industries.
5. Invest in Britain is a project of the Economic Change Unit (ECU), a non-profit organisation that campaigns to change the way the economy works so everyone has the freedom and security to live a good life.