Joint statement on public investment

The UK economy is facing some major challenges, from poor productivity and economic growth, to collapsing public services and deteriorating health outcomes. 

Among expert economists a consensus is emerging that underinvestment is a central cause of the UK’s poor economic performance in recent years and the root of many of the problems we now face as a country. 

This underinvestment has resulted in a vicious circle of stagnation and decline, whereby low investment leads to both a weaker economy and greater social and environmental problems, which themselves require greater investment to solve.

While some of these challenges exist in other countries, the UK has performed particularly poorly, exemplified by the fact that we have had the lowest investment in the G7 for 24 of the last 30 years.

The new government is right to argue that a change of direction is needed, one that puts the country on the path to greater prosperity and longer-term fiscal sustainability. The government’s recognition of the importance of raising private sector investment levels as part of a plan for national renewal is also very welcome.

However, increased private sector investment will not be sufficient to address the UK’s challenges unless it is accompanied by a substantial rise in public sector investment.

The challenge of renewing Britain requires the rebuilding of crumbling public services whilst also investing in the clean infrastructure needed to meet our climate targets and create an economy that is more resilient in the future. This challenge cannot be met by the private sector alone, it requires a step change in levels of public investment. The challenge also presents an opportunity to secure rising living standards, more good jobs in every region, cleaner air, and high quality public services that we can rely on when we need them.

The government’s plans to invest in these challenges through a new National Wealth Fund and Great British Energy are commendable, but they come in the context of inherited spending plans that imply substantial real terms cuts in public investment over the current parliament. We do not see how the planned “decade of national renewal” can take place if these cuts are delivered. To follow through on these plans would be to repeat the mistakes of the past, where investment cuts made in the name of fiscal prudence have damaged the foundations of the economy and undermined the UK’s long-term fiscal sustainability.

The current fiscal framework has helped to drive this short term thinking and created an inbuilt bias against investment, leading to low growth and rising debt levels. The Office for Budget Responsibility has demonstrated that the economic benefits of public investment accrue over a long period of time, but our fiscal rules focus only on the short term impact. A more responsible approach, which better reflects the significant long-term benefits of increased public investment, will require changes to our fiscal rules and to the mandate for the OBR.

With the government’s first Budget and Spending Review due later in the year, it is essential that the government recognises the important role that public investment must play in the decade of national renewal. Further cuts to public investment must be avoided, a strategy for substantially increasing public investment adopted, and a process initiated to implement a pro-investment fiscal framework which focuses on long-term fiscal sustainability. Guided by its five missions, the UK government should adopt a cross-sectoral and mission-oriented industrial strategy to strategically direct its public investment towards tackling the country’s biggest challenges.

With these steps, the government will have a real chance of genuinely fixing the foundations of the UK economy and ushering in the period of national renewal that is so sorely needed.

Signed by:

Lord Gus O’ Donnell Former Cabinet Secretary and Head of the UK Civil Service, Former Permanent Secretary of the Treasury

Lord Jim O’Neill Honorary Chair of Economics at Manchester University, Former Commercial Secretary to the Treasury, Former Chief Economist of Goldman Sachs and Chair of Goldman Sachs Asset Management

Professor Mariana Mazzucato Founding Director of UCL Institute for Innovation and Public Purpose (IIPP)

Professor Susan Newman Head of Economics, The Open University

Dr Mohamed El-Erian President of Queens’ College Cambridge, Former Chief Executive PIMCO

Sir Anton Muscatelli Principal University of Glasgow, Chair of the Royal Economic Society

Professor Simon Wren-Lewis Emeritus Professor of Economics, University of Oxford, one of the UK’s foremost fiscal policy experts

Professor Jonathan Portes Professor of Economics and Public Policy, King’s College London, Former Chief Economist at the Department for Work and Pensions and the Cabinet Office, Former Director of the National Institute for Economic and Social Research (NIESR)

An abridged version of this statement appeared in the Financial Times on Sunday 15th September 2024