The UK public sector has been lagging behind its competitors in terms of investment for over 15 years. This is partly due to poorly applied fiscal rules that have restricted public spending on crucial infrastructure. These rules are meant to prevent politicians from overspending and using the public credit card for personal gain, but when applied incorrectly they can hinder economic growth and development.
The lack of investment in public infrastructure has led to the UK’s public sector being the second most volatile among advanced economies. As a result, businesses are turning away from the UK and private investment is lower than in most other major economies. This has created a cycle of low investment, low growth, and stagnant wages that has persisted for two decades, leaving the country struggling to keep up with its competitors.
To stimulate investment and economic growth, the government needs to focus on promoting investment in core public assets that will generate future returns. This will create fiscal space and prevent the cycle of austerity that has hampered productivity growth in the UK. However, concerns about government overspending on infrastructure and skills are misplaced, given the country’s history of systematic underinvestment.
The UK also faces a structural macroeconomic problem in that it saves less out of national income than most other advanced economies. This lack of saving has led to increased borrowing from abroad, making the country vulnerable to economic shocks and reducing the returns on UK investments. To address this issue, the government needs to focus on increasing domestic saving and ensuring that revenues come from returns to investment rather than consumption.
In order to support much-needed public investment, the current falling public debt to GDP rule should be dropped. Instead, a new fiscal rule should focus on fully and robustly funding government consumption through taxation, while borrowing only for net investment. This will allow for greater investment without excess borrowing from abroad and will ensure that debt remains sustainable in the long term.
Overall, a new set of fiscal rules is needed to support long-term investment and economic growth in the UK. By focusing on investing in core public assets, increasing domestic saving, and ensuring that public debt is used for productive investment rather than consumption, the country can break free from the cycle of chronic underinvestment and economic instability. It is crucial for the government to adopt intelligent fiscal discipline that supports long-term growth and development, rather than relying on arbitrary and counterproductive rules that hinder economic progress.
