Chancellor Rachel Reeves has said she will “invest in the foundations of future growth” in the clearest signal yet that the new government will ramp up public investment in next week’s Budget.
Speaking in Washington, Reeves will outline how public investment can upgrade core pieces of infrastructure, encourage innovation in science and technology and enable the energy transition.
“Our upcoming Budget will be a reset for our economy as we invest in the foundations of future growth,” she will say at the International Monetary Fund’s (IMF) latest annual meeting.
The comments are the latest to point to a likely step-change in public investment in the Budget next week.
Many economists argue that public investment has been too low for too long, which has had a detrimental impact on economic growth.
According to the Institute for Public Policy Research (IPPR), public investment as a share of GDP has lagged the G7 average every year since the early 1990s.
The fiscal rules, which require debt to be on a downward trajectory in five years time, are often blamed for the UK’s under-investment because the benefits of investment programmes are felt beyond the forecast horizon.
Last month Reeves suggested that she will reform the fiscal rules to “take account of the benefits of investment, not just the costs”.
While there is a relatively broad consensus in favour of increasing public investment, there is more debate about exactly how to reform the fiscal rules.
One possibility, supported by a number of left-leaning think tanks, is to include the value of physical assets owned by the government, such as roads, schools and hospitals.
This is known as public sector net worth (PSNW). Targeting PSNW could free up space for nearly £60bn in extra investment. However, Alison Ring, director of public sector and taxation at the ICAEW, questioned whether PSNW would provide a good foundation for a fiscal target.
“It is crucial that the Chancellor proceeds with caution, as moving too quickly to a net worth measure could see markets question the government’s commitment to put the public finances on a sustainable footing,” she said.
The influential Institute of Fiscal Studies (IFS) has also drawn attention to the difficulties of measuring the value of physical assets.
Changes to PSNW also reveal “little about the government’s ability to access capital markets or service its debt,” researchers at the think tank said.
The Chancellor will confirm the details of the fiscal rules at the Budget, but she will stress in Washington that her policies will be “built on the rock of economic stability”.