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Dear Chancellor,
Since coming into office last year, this government has taken a number of welcome steps to address the substantial, longstanding under-investment in the UK economy.
At the Comprehensive Spending Review, the government brought forward changes to the fiscal framework which enabled £113bn of additional capital investment in the current Parliament, cancelling out the previously planned cuts. This provided a crucial boost across the fundamental infrastructure that forms the bedrock of our economy – from research and development to schools and hospitals.
While this represents a useful first step in addressing the investment gap that has held back growth and prosperity for over a decade, a much bolder approach is required to meet the economic, environmental and geopolitical challenges we face as a country.
As highlighted by the recent Office for Budget Responsibility report on long-term risks, the UK finances are not on a sustainable path. Yet rather than grappling with the fundamental challenges posed by issues such as climate change or our ageing population, the fiscal policy debate is focused on whether or not the government can hit arbitrary, short-term targets determined by highly volatile forecasts.
The only route to fiscal sustainability lies in finding a more sustainable growth model for the economy as a whole. This will not be achieved without a significant further increase in public investment. On the current trajectory, public investment is set to remain flat as a share of GDP over the course of this Parliament, substantially lower than both the OECD and the UK’s own post-war averages.
Having set out clear priorities across the missions, the Industrial Strategy and the 10 Year Infrastructure Plan, the government must now invest in these at the higher level needed to provide the foundations for a credible, serious plan for growth.
To deliver the stability you have rightly emphasised, you must find additional tax revenue at the coming Budget. There are progressive, pro-growth options available if the government is willing to undertake more fundamental reforms to the tax system. Above all, the tax and pension system needs to be rebalanced so that better-off older people, especially those with substantial property and pension wealth, make a much larger contribution to addressing the fiscal pressures that result from increasing spend on the NHS, social care and pensions. These and other pressures on public spending must also be managed in a more sustainable way.
To minimise volatility, the government should also adopt the IMF’s recommended changes to the UK fiscal framework, including moving to one assessment against the fiscal rules per year. Pro-investment reforms to the fiscal framework could also boost fiscal credibility – for example, by requiring governments to address long-term risks, like climate change, at fiscal events. Furthermore, with appropriate safeguards in place, the government could make more use of the opportunities created by last year’s move to a debt rule based on public sector net financial liabilities.
The fiscal constraints that the UK faces are real, but they are not inescapable. We have set out the elements of a credible strategy to boost economic growth and prosperity, strengthen fiscal sustainability, and enhance business and investor confidence.
Lord Gus O’Donnell
Former Cabinet Secretary
Lord Jim O’Neill
Former Commercial Secretary to the Treasury
Professor Mariana Mazzucato
Founding Director of the Institute for Innovation and Public Purpose, University College London
Mohamed El-Erian
President of Queens’ College, Cambridge
Professor Sir Anton Muscatelli
Adam Smith Business School, University of Glasgow
Professor Simon Wren-Lewis
Emeritus Professor of Economics, University of Oxford
Professor Jonathan Portes
Professor of Economics and Public Policy, King’s College London