Measures to boost public investment in
today's budget reverse planned cuts and mean the Starmer
government is forecast to deliver the highest average level of
public investment of any prime minister since Harold Wilson in
the 1970's, IPPR analysis has found.
Total gross public investment is now
projected to be £66 billion higher over this parliament, compared
to the OBR forecast made at the time of the March
budget.
Pre-budget plans by both the
Conservatives and Labour parties in their manifestos would have
left the UK tumbling down the international league table on
public investment. It is already at the bottom of the league
among G7 economies for overall investment (public and private).
But on the government's new plans, the UK will approach the
average public investment level of other G7 economies in the
middle of the parliament.
IPPR has also calculated that the
planned increase in public investment could boost the economy by
0.39 per cent of GDP (£14 billion) in the final year of the
forecast - almost three times the amount (0.14 per cent of GDP)
that the OBR projects as a result of the increase. This is
because the OBR uses, in light of the economic literature, an
unduly pessimistic model to estimate the impact of public
investment. It does for instance not clearly model the private
investment it triggers – so-called ‘crowding
in'.
The higher projection for GDP growth
would also mean higher tax revenues for the government over the
years ahead, enabling it to increase day-to-day spending on
public services further without raising tax
rates.
Going forward, the OBR‘s baseline
estimate should more explicitly model the second round effects of productive public investment,
which leads to higher private investment, labour force
participation and consumption. A short paper setting out the case
for rethinking the OBR's modelling is published by IPPR today
(see Note 1).
Dr George Dibb, associate
director for economic policy at IPPR,
said:
“Today the chancellor has rightly
halted the planned cuts to public investment that now looks set
to stay broadly constant over the parliament. To find a
historical comparator to Reeves and Starmer on public investment
you have to go back to Jim Callaghan and Harold Wilson in the
70's.
“The chancellor's sensible change
to modernise the UK's fiscal rules has opened the way to an
ambitious path to greater public investment – holding us steady
in the G7 league instead of falling behind Italy and the
USA.
“After at least a decade of
under-investment, there is now real hope that the government can
start to fix the UK's economic
foundations.”
Carsten Jung, IPPR's head of
macroeconomics, said:
“It is excellent news that the
government is significantly boosting public investment compared
to its previous downward trend. Strategic investment has the
potential to significantly increase growth, as the recent bumper
growth experience in the USA has shown. The USA has left European
economies in the dust through bold industrial strategy investment
and other fiscal policy
support.
“The OBR has made great strides in
improving its modelling of the benefits of public investment, but
it is still making very conservative assumptions of the impact of
such investments on the wider economy. In particular, it needs to
further model the second round effects of public investment on
business decisions. Doing so would show more clearly the growth
benefits of a bold investment
agenda.”
ENDS
NOTES TO
EDITORS
-
1. IPPR has today published a short
paper exploring the GDP boost resulting from today's budget,
at https://www.ippr.org/articles/second-round-effects
