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Even Conservatives agree – the British economy needs public investment

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“There is a strong case for borrowing more to fund infrastructure projects that will deliver a return on our investment through improved productivity.”
Philip Hammond. Jack Taylor/Getty Images
Jack Taylor/Getty Images

So thinks Nick Timothy, former joint chief of staff to Theresa May, writing in yesterday’s Sun. And he’s right. The argument for using next week’s Budget to boost state investment is as strong as it’s ever been, and the list of people joining the TUC in calling on the government to do just that is getting longer. We have called for the government to bring public investment spending up to the OECD average, equivalent to an annual boost of £19bn.

Why the UK economy needs an upgrade

The UK’s economic performance so far in 2017 has been poor. Gross Domestic Product (GDP) grew by just 0.5 per cent in the first half of the year, putting us 31st in a league table of 34 advanced economies, and far behind the EU as a whole (1.2 per cent). Growth of 0.4% in the third quarter hasn’t done much to change this picture. The Institute for Fiscal Studies (IFS) points out that national income per adult was 15% lower at the last Budget in March than it would have been if pre-2008 trends had continued. By 2022, the gap is set to grow to 18%, performance the IFS describes as “astonishing”.

This weak growth is partly driven by low levels of investment. Both the government and private sector firms are spending far less on upgrading skills, equipment and infrastructure than our partners in the Organisation for Economic Cooperation and Development (OECD). Adding the public and private sectors together, we’re investing almost a quarter less than the OECD average – a gap equivalent to more than £90bn a year.

Total gross fixed capital formation, % GDP

Source: OECD

This leads to flatlining productivity which, in part, explains the abysmal wage growth of the last decade. The average worker is now almost £40 a week worse of in real terms then they were 10 years ago. And it’s a vicious circle – planned government cuts and falling wages reduce demand in the economy and lessen the incentive for businesses to invest.

Breaking the cycle

It’s down to the government break this cycle by increasing investment levels. Analysis of figures from the International Monetary Fund shows that the only countries that have seen an increase in employment and wages are those whose governments did not embrace austerity policies in the wake of 2008. The OECD has also advised the UK government that “further fiscal initiatives to increase public investment should be considered to support demand in the short term and boost supply in the longer term”.

As we set out earlier this week some of this spending must go towards staving off a crisis in our public services. But we also need more investment in physical infrastructure like transport and housing, and R&D.

This has long been the view of the TUC, and it’s a view that’s gaining followers. Last week Conservative MP Nick Boles made his plea to the Chancellor to loosen the purse strings:

“Productivity in the UK will increase if we have better transport and communications infrastructure (especially outside London), if we increase dramatically the number of people with technical and management skills, if we do a lot more scientific research, and if employers invest a lot more in automation and other capital equipment… we need to do them all and, as a rule of thumb, spend at least 50% more on each of them than we are currently doing.”

So it’s getting harder and harder to dismiss calls to invest in an economy that delivers jobs and prosperity as radical or reckless. The Chancellor should use this Budget to commit to bringing UK government investment into line with the OECD average – an increase from 2.7 per cent of GDP to 3.5 per cent – equivalent to £19bn.

How to spend it

And there’s no shortage of areas that would benefit from some more government support.

Housing has to be one of the top priorities. Poor quality, overcrowded and unaffordable housing blights the lives of many (and costs the NHS around £2bn a year). Building more houses would directly improve the lives of millions as well as boosting the economy. So the Chancellor should use next Wednesday’s announcement to increase the housing budget for the Department for Communities and Local Government, give more financial support local government house-building and lift local authority borrowing caps to allow them to build more social and affordable housing.

But to make sure public spending delivers sustainable economic growth, the government must also set out a clear strategy to deliver better jobs across the country. Its white paper on industrial strategy, expected around the same time as the Budget, offers an opportunity to do this, and must build on the promising proposals in an earlier green paper to invest in infrastructure and training.

But there are still critical elements missing. More focus needs to be given to the role that workers and their unions can play. Workers’ participation in UK company decision making is poor compared to other European countries, and there is clear evidence that improving this increases productivity. We also need to raise our performance in low paid sectors, where our productivity gaps with other European countries is largest. One way to do this would be to introduce new sector bodies in the low paid industries, charged with increasing pay, efficiency and general business success in each of the low paid industries – something the government should look to pilot.

Reports suggest Philip Hammond is still resistant to the idea of increasing government investment. But continuing feeble economic performance will make it increasingly difficult to ignore these calls.

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