Get rid of Britain’s bias against investment, Reeves told

A substantial increase in public investment through reform of Britain’s fiscal rules is required to fix the “foundations of the UK economy”, a group of senior economists have told the Treasury as preparations continue for next month’s budget.
Under-investment is a “central cause” of the recent poor economic performance and the problems facing the country, according to the group of eight economists, which includes Lord O’Donnell, a former cabinet secretary, and Lord O’Neill of Gatley, a Treasury minister in David Cameron’s government.
It has created a “vicious circle of stagnation and decline, whereby low investment leads to both a weaker economy and greater social and environmental problems”, they said in a letter to the Financial Times.
Labour’s plan for a “decade of national renewal” requires the rebuilding of “crumbling” public services, while investing in infrastructure to hit climate targets and create a more resilient economy, they argue. However, that requires not only private sector support but a “step change in levels of public investment”.
Changes are needed to the government’s fiscal rules as well as to the role of the Office for Budget Responsibility, the UK’s fiscal watchdog, they added, as Labour has inherited spending plans that “imply substantial real-terms cuts in public investment over the current parliament”.
The signatories, who also include Mariana Mazzucato, an economics professor at University College London, warn against continuing with the previous government’s fiscal plans “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”.
They wrote: “The current fiscal framework has helped to drive this short-term thinking and created an inbuilt bias against investment.”
Instead, in the budget on October 30, Rachel Reeves must substantially increase public investment and launch a process “to implement a pro-investment fiscal framework”.
In her Mais Lecture in March, Reeves said that Britain could not continue with a “short-termist approach that disregards the importance of public investment. But we also cannot ignore the pressing need to rebuild the UK’s public finances, to increase our space to respond to future shocks”.
She said Labour’s fiscal rules would differ by targeting day-to-day spending while prioritising investment “within a framework that would get debt falling as a share of GDP over the medium term”.
A spokesman for the Treasury said: “The chancellor has vowed to lead the most pro-growth, pro-business Treasury in the country’s history, with early action taken already to unlock investment with a new national wealth fund, pensions review and an overhaul of our planning system.
“The chancellor has set out her commitment to robust fiscal rules and will set out precise details at the budget.”
The letter was also signed by Mohamed El-Erian, former chief executive at Pimco; Sir Anton Muscatelli, chairman of the Royal Economic Society; Simon Wren-Lewis, emeritus professor of economics at Oxford University; Jonathan Portes, professor of economics and public policy at King’s College London; and Susan Newman, head of economics at the Open University.