Weak public investment an ‘institutional failure of the British state’ – report

A long-running cycle of weak public investment represents an “institutional failure of the British state” which has undermined economic growth and key services, according to a leading think tank.

The Resolution Foundation has called for fiscal rules which determine Government spending and tax decisions to be changed as a starting point for addressing the problem, but said removing decision-making on public investment from HM Treasury may also be needed.

The report – Cutting the Cuts – published on Thursday highlights that low levels of public investment have consistently placed the UK among the weakest third of the 38 OECD advanced economies in this area of spending and made the country poorer.

“That is a country living off its past, not prioritising its future,” the report said.

Public investment constitutes a fifth of all investment in the UK, with the private sector providing the majority.

If public investment in areas such as transport, housing, healthcare and local services had been in line with the average of OECD countries over the past two decades, it would have delivered a “truly transformational” extra £500 billion based on 2022 prices, the research found.

It added that spending decisions have had “clear consequences in our day-to-day lives”, with weak public investment a key factor in the UK having fewer hospital beds per person than all but one other OECD country, and higher commuting times for workers than all but two.

Frequent significant changes to public investment levels have meant the UK now has the second most volatile annual growth among OECD countries, the report said.

This has disrupted the delivery on investment, with governments during the last seven spending reviews when increases were planned failing to spend £1 in every £6 pledged, it added.

“Strong political and fiscal incentives” to reduce public investment when public finances are under pressure were identified as a key driver of this volatility.

Political “short-termism” means ministers opt to abandon future projects rather than take “unpopular decisions” to increase taxes or cut funding for core public services, the report said.

“Cancelling a bridge tomorrow is far easier to firing a nurse today,” it added.

The report said this approach is reinforced by fiscal frameworks focused on reducing net debt which do not distinguish between capital investment and current spending.

Therefore, chancellors who have left “too small buffers against their fiscal objectives” have opted to use investment as the “margin of fiscal adjustment” in the event of “even small adverse shocks” to the public finances.

The Resolution Foundation also described the current parliament as offering a “sobering example of this failure”.

Government plans to raise public investment following the 2019 election were abandoned in the wake of Liz Truss’s mini-budget last year, with current plans under Chancellor Jeremy Hunt set to reverse more than 80% of increases previously announced, the report said.

It added: “This repeated failure on public investment is so great that it represents an institutional failure of the British state and that our approach to public investment requires policy and institutional change.”

Altering the fiscal rules so public investment is treated differently to day-to-day spending should be the starting point for a new approach, the report said.

It added that “more radical institutional change” was required, with the introduction of legislation to place responsibility for setting overall public investment decisions with parliamentarians rather than HM Treasury.

This would “raise the bar” for public investment cuts being used for “fiscal fine tuning” and reinforce cross-party consensus on the need for increased spending in this area, the report said.

The report acknowledges the new approach would increase debt in the short-term but it found a stable level of public investment of 3% of GDP would boost economic growth by around 0.8% over the five years of the Office of Budget Responsibility’s current forecast.

This growth would be “broadly consistent” with the fiscal rules of both main parties, it added.

James Smith, research director at the Resolution Foundation, said: “The UK is a low investment nation. Too often we are living off our past rather than investing in our future. Turning that around means big changes to how public investment decisions are made and stuck to.”

A Treasury spokesperson said: “Despite the tough decisions we’ve taken to stabilise the public finances, we are maintaining record levels of capital investment with £600 billion over the next five years – investing in critical infrastructure like Northern Powerhouse Rail, HS2 and Sizewell C.

“Our fiscal rules underpin our fiscal sustainability and credibility, allowing us to maintain high levels of future investment – and we continue to monitor and report on metrics that distinguish between day-to-day and capital spending.”