BRITAIN’S CYCLE of weak and highly volatile public investment has left the country poorer, and is so deeply embedded that a complete overhaul is needed of how we make decisions on critical public investment, according to new research from the Resolution Foundation.

Cutting the cuts – the 34th report of The Economy 2030 Inquiry, funded by the Nuffield Foundation – notes that Britain has long been a low investment nation, which has damaged economic growth. And while the majority of investment is made in the private sector, public investment plays a key role, accounting for a fifth of total investment in the UK.

Britain is also an international laggard when it comes to public investment – consistently featuring in the weakest third of OECD countries. Had the UK’s levels been at the OECD average over the past two decades, public investment would have been a truly transformational £500 billion higher (in 2022 prices).

The Foundation says that this long-term failure to invest in our transport, housing, healthcare and local services has clear consequences in our day-to-day lives, and has made Britain poorer. It lies behind the fact that we have fewer hospital beds per person than all but one OECD advanced country, and spend more time commuting than all but two.

The report adds that as well investment levels being too low, they are too volatile, with frequent, large changes in investment spending plans – with the UK having the most volatile annual growth rate among all OECD advanced economies bar one. This volatility hampers efforts to deliver investments: the government on average failing to spend around £1 in every £6 it plans to.

Strong political and fiscal incentives to cut public investment when the public finances are under pressure are the key reasons for this unhelpful volatility. Csut averaging nearly 20 per cent have been made in each of the post-recession fiscal consolidations which have taken place since the 1970s.

The current parliament offers a sobering example of this failure. Following the 2019 General Election, to its credit, the Government set out plans to address the UK’s low-investment legacy by raising it to levels not sustained since the 1970s.

However, this planned increase in public investment spending was cut just two years later in the wake of Liz Truss’ mini-budget, and is now due to be frozen in cash terms in the second half of the decade – reversing more than 80 per cent of the increases announced just three years ago.

The Foundation says that this repeated failure in 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. A new approach should start by changing the fiscal rules that govern how spending and tax decisions are made, which currently do nothing to treat investment spending differently from day-to-day public service spending.

However, the report notes that doing this may not be enough and that more radical institutional change may be needed, such as taking decisions about public investment levels out of the Treasury altogether and placing responsibility instead on parliament, setting it through an Act at the start of each parliament. This would raise the bar for using cuts to public investment for the purposes of fiscal fine tuning and help to reinforce the cross-party consensus that higher public investment is needed.

Transferring this power would also leave the Treasury with greater capacity to focus on improving the quality of public investment, by ensuring greater transparency over the business case for particular projects and setting longer-term budgets for departments, or strategic infrastructure projects such as HS2.  More investment decisions should also be devolved outside of Whitehall.

While this approach would transform public investment, it could also lead to higher public debt in the short term. However, the Foundation’s modelling shows that offering a stable increase in public investment – set at three per cent of GDP – would boost growth (by around 0.8 per cent over the five years of the OBR’s fiscal forecast) and should still be broadly consistent with the rules set out by both main parties of having the UK’s debt-to-GDP ratio on a downward path in five years’ time.

James Smith, Research Director at the Resolution Foundation, said: “Britain’s record on public investment is one of long-term failure. Our investment levels are too low and too volatile, as investment plans are announced and then scrapped before they ever get going. As a result, we are left with overwhelmed hospitals, often terrible public transport and a chronic shortage of housing.

“We need to completely reset our approach to public investment, rewriting the UK’s fiscal framework to remove the strong incentive for the Treasury to cut public investment when bad news turns up, and moving decisions about the quantity of public investment to Parliament from the Treasury.

“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.”

* Read: Cutting the cuts: How the public sector can play its part in ending the UK’s low-investment rut here.

* Source: Resolution Foundation