Resources

This briefing outlines the case for reforming the UK’s anti-investment fiscal rules and explains what a shift to Public Sector Net Financial Liabilities (PSNFL) would involve. It also sets out why claims that increased government borrowing for public investment would increase inflation and mortgage costs are based on unsound assumptions.

The UK has consistently seen one of the lowest levels of public investment in the G7 in recent decades, and has been well below the OECD average in this period as well. Reversing this trend and significantly increasing UK public investment is the only thing that can break the ‘doom-loop’ of low investment, low productivity, and low growth, boosting public services, job creation and prosperity, and helping to crowd-in beneficial private investment.

The Institute for Public Policy Research’s (IPPR) latest analysis found that the UK has been bottom of the G7 league for investment in 24 out of last 30 years and, under current plans inherited from the last government, “a Starmer-led government would end its first term having cut investment more than the entire Conservative 2010-24 administration”, putting future growth at risk.

The National Institute for Economic and Social Research (NIESR) propose increasing public investment to 5% of GDP (an extra £50bn per year) to solve the four major issues that the new government has inherited – low productivity growth, declining living standards, persistent regional inequality and a “fiscal framework that is stifling much-needed public investment“.

The Office for Budget Responsibility calculated that the UK’s debt:GDP ratio could rise to 350 to 400% without action to stop climate change. If progress is delayed until 2030, GDP would be 3.2% lower by 2050 and double the costs of meeting our climate targets, following a period of economic disruption which peaks at 6.6% of GDP loss in 2033-34. 

The London School of Economics (LSE) Grantham Research Institute propose increasing public investment by at least 1% of GDP (a lower bound of an additional £26bn a year in current prices) to make up for decades of underinvestment, help tackle climate change, biodiversity loss and environmental degradation and to become economically productive, efficient and competitive in the future. 

The Office for Budget Responsibility estimates that increasing public investment by 1% of GDP boosts output by 0.5% after 5 years, but 2.5% after 50 years. They also explain why public investment is good value for money, as the fiscal return on public investment is higher than government borrowing costs.

The Institute for Government (IfG) explains that the UK’s fiscal framework and fiscal rules entrench an anti-investment bias, are often gamed for political expediency, and do little to promote fiscal sustainability. 

The LSE’s Centre for Economic Transition Expertise (CETEx) proposes changes to the UK’s fiscal framework, such as exempting the UK’s public finance institutions from fiscal rules, to  unlock the additional investment required to meet the UK’s net zero targets and adapt to climate change.