Government spending plans not enough to stop falling public investment
The chancellor will need to spend an extra £20bn by the end of the parliament to maintain public investment at its present levels.
Rachel Reeves has promised to unveil a “budget for investment” next week, while reversing the “years of underinvestment” overseen by the previous Conservative government.
However, this would involve taking on billions of pounds of fresh debt if, as is widely expected, the government chooses to borrow more to invest.
Under plans inherited by the previous government, public investment as a share of national income (excluding student loans) was due to hit 2.1% of GDP at the end of this financial year before falling sharply during the rest of the parliament.
In its manifesto, Labour outlined an extra £5bn of investment plans.
Money blog: Charge motorists for every mile they drive, chancellor urged
However, this is not sufficient to reverse the downward trend and would see public investment as a share of GDP settle at 1.6% by the end of the parliament.
Earlier this month, the government also pledged an additional £22bn for carbon capture but said it would be delivered over a 25-year timeline, so it has not been included in the analysis.
In order to maintain public investment as a share of national income at its 25-year average of 1.7% of GDP, the government would have to borrow an extra £10bn.
It would involve an additional £20bn to maintain it at its present levels (2.1% of GDP), according to economists at the Institute for Fiscal Studies (IFS).
What counts as investment?
Government investment can be wide-ranging.
It includes building new schools, buying new NHS equipment and spending on building new roads and railways. Britain has a shaky track record when it comes to delivering these types of projects.
Low comparative investment
Analysis by the Institute for Public Policy Research (IPPR) thinktank shows that public investment in the UK remains below average within the G7 club of advanced economies public investment.
Dr George Dibb, associate director at IPPR, said: “The UK has had chronically low levels of public investment since the 1970s, this has left us with crumbling infrastructure, out-of-date technology in our public services and undermined the foundations of our economy.
“Compared to other G7 economies we’ve never even been average.”
“Rachel Reeves has the chance to turn this around, however she needs to grapple with severe cuts to public investment locked in by the previous government,” he added.
The picture is even worse when business investment is included in the analysis – Britain languishes at the bottom of the table.
The chancellor said she is prepared to borrow more to fund this type of investment spending, something she believes is a critical part of her mission to deliver more economic growth.
In her conference speech in September, she said: “We find ourselves at the very bottom of the G7 league table for economy-wide investment as a share of our GDP. And we must change that.”
Reeves tweaked her self-imposed fiscal rules – which required debt to be falling as a share of GDP by the fifth year of the parliament – in order to manage this extra borrowing.
👉 Click here to follow Electoral Dysfunction wherever you get your podcasts 👈
How to invest more
Economists have long argued that the current system prevents governments from making long-term investments that could grow the economy.
Ms Reeves is expected to use a new measure of debt, “public sector net financial liabilities”.
This is a wider measure of the state balance sheet which takes into account the government’s assets – such as hospitals, schools and its student loan book – as well as its liabilities and effectively creates more room for borrowing by reclassifying some debt as assets.
This gives a broader view of the government’s fiscal position and could unlock more than £50bn in additional headroom, giving the chancellor sufficient space to overturn the downward trend in public investment.
Keep up with all the latest news from the UK and around the world by following Sky News
However, this change would not impact the government’s ability to service its debt and economists have warned the chancellor against using up all of that extra headroom in case it triggers a perverse reaction in the bond markets.
With public sector net debt at its highest level relative to GDP since the early 1960s, the IFS said that such a move could trigger a buyer’s strike in the bond markets.
The business secretary will next week hold talks with dozens of private sector bosses as the government contends with a significant corporate backlash to Labour’s first fiscal event in nearly 15 years.
Sky News has learnt that executives have been invited to join a conference call on Monday with Jonathan Reynolds, in what will represent his first meaningful engagement with employers since Wednesday’s budget statement.
Rachel Reeves, the chancellor, unsettled financial markets with plans for billions of pounds in extra borrowing, and unnerved business leaders by saying she would raise an additional £25bn annually by hiking their national insurance contributions.
An increase in employer NICs had been trailed by officials in advance of the budget, but the lowering of the threshold to just £5,000 has triggered forecasts of a wave of redundancies and even insolvencies across labour-intensive industries.
Sectors such as retail and hospitality, which employ substantial numbers of part-time workers, have been particularly vocal in their condemnation of the move.
Keep up with all the latest news from the UK and around the world by following Sky News
On Friday, the Financial Times published comments made by the chief executive of Barclays in which he defended Ms Reeves.
“I think they’ve done an admirable job of balancing spending, borrowing and taxation in order to drive the fundamental objective of growth,” CS Venkatakrishnan said.
His was a rare voice among prominent business figures in backing the chancellor, however, with many questioning whether the government had a meaningful plan to grow the economy.
Mr Reynolds held a similar call with business leaders within days of general election victory, and over 100 bosses are understood to have been invited to Monday’s discussion.
A spokesman for the Department for Business and Trade declined to comment ahead of Monday’s call.
First things first: don’t panic.
What you need to know is this. The budget has not gone down well in financial markets. Indeed, it’s gone down about as badly as any budget in recent years, save for Liz Truss’s mini-budget.
The pound is weaker. Government bond yields (essentially, the interest rate the exchequer pays on its debt) have gone up.
That’s precisely the opposite market reaction to the one chancellors like to see after they commend their fiscal statements to the house.
In hindsight, perhaps we shouldn’t be surprised.
After all, the new government just committed itself to considerably more borrowing than its predecessors – about £140bn more borrowing in the coming years. And that money has to be borrowed from someone – namely, financial markets.
But those financial markets are now reassessing how keen they are to lend to the UK.
The upshot is that the pound has fallen quite sharply (the biggest two-day fall in trade-weighted sterling in 18 months) and gilt yields – the interest rate paid by the government – have risen quite sharply.
This was all beginning to crystallise shortly after the budget speech, with yields beginning to rise and the pound beginning to weaken, the moment investors and economists got their hands on the budget documentation.
Please use Chrome browser for a more accessible video player
Chancellor challenged over gilt yield spike
But the falls in the pound and the rises in the bond yields accelerated today.
This is not, to be absolutely clear, the kind of response any chancellor wants to see after a budget – let alone their first budget in office.
Indeed, I can’t remember another budget which saw as hostile a market response as this one in many years – save for one.
That exception is, of course, the Liz Truss/Kwasi Kwarteng mini-budget of 2022. And here is where you’ll find the silver lining for Keir Starmer and Rachel Reeves.
The rises in gilt yields and falls in sterling in recent hours and days are still far shy of what took place in the run up and aftermath of the mini-budget. This does not yet feel like a crisis moment for UK markets.
But nor is it anything like good news for the government. In fact, it’s pretty awful. Because higher borrowing rates for UK debt mean it (well, us) will end up paying considerably more to service our debt in the coming years.
Rachel Reeves leaving 11 Downing Street before the budget. Pic: PA
And that debt is about to balloon dramatically because of the plans laid down by the chancellor this week.
And this is where things get particularly sticky for Ms Reeves.
In that budget documentation, the Office for Budget Responsibility said the chancellor could afford to see those gilt yields rise by about 1.3 percentage points, but then when they exceeded this level, the so-called “headroom” she had against her fiscal rules would evaporate.
Read more:
Chancellor defends £40bn tax rises
Hefty tax and spending plans a huge gamble – analysis
In other words, she’d break those rules – which, recall, are considerably less strict than the ones she inherited from Jeremy Hunt.
Which raises the question: where are those gilt yields right now? How close are they to the danger zone where the chancellor ends up breaking her rules?
Short answer: worryingly close. Because, right now, the yield on five-year government debt (which is the maturity the OBR focuses on most) is more than halfway towards that danger zone – only 56 basis points away from hitting the point where debt interest costs eat up any leeway the chancellor has to avoid breaking her rules.
Now, we are not in crisis territory yet. Nor can every move in currencies and bonds be attributed to this budget.
Keep up with all the latest news from the UK and around the world by following Sky News
Markets are volatile right now. There’s lots going on: a US election next week and a Bank of England decision on interest rates next week.
The chancellor could get lucky. Gilt yields could settle in the coming days. But, right now, the UK, with its high level of public and private debt, with its new government which has just pledged to borrow many billions more in the coming years, is being closely scrutinised by the “bond vigilantes”.
A Halloween nightmare for any chancellor.
-
Sports2 years ago‘Storybook stuff’: Inside the night Bryce Harper sent the Phillies to the World Series
-
Sports7 months agoStory injured on diving stop, exits Red Sox game
-
Sports2 years agoMLB Rank 2023: Ranking baseball’s top 100 players
-
Sports1 year agoGame 1 of WS least-watched in recorded history
-
Environment1 year agoJapan and South Korea have a lot at stake in a free and open South China Sea
-
Sports3 years ago
Team Europe easily wins 4th straight Laver Cup
-
Environment2 years agoGame-changing Lectric XPedition launched as affordable electric cargo bike
-
Business2 years agoBank of England’s extraordinary response to government policy is almost unthinkable | Ed Conway