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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.

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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.

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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UK has had chronically low levels of public investment since the 1970s, this has left us with crumbling infrastructure, out-of-date technology in our public services and undermined the foundations of our economy.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.

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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.

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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.

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UK economy figures not as bad as they look despite GDP fall, analysts say

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UK economy figures not as bad as they look despite GDP fall, analysts say

The UK economy unexpectedly shrank in May, even after the worst of Donald Trump’s tariffs were paused, official figures showed.

A standard measure of economic growth, gross domestic product (GDP), contracted 0.1% in May, according to the Office for National Statistics (ONS).

Rather than a fall being anticipated, growth of 0.1% was forecast by economists polled by Reuters as big falls in production and construction were seen.

It followed a 0.3% contraction in April, when Mr Trump announced his country-specific tariffs and sparked a global trade war.

A 90-day pause on these import taxes, which has been extended, allowed more normality to resume.

This was borne out by other figures released by the ONS on Friday.

Exports to the United States rose £300m but “remained relatively low” following a “substantial decrease” in April, the data said.

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Overall, there was a “large rise in goods imports and a fall in goods exports”.

A ‘disappointing’ but mixed picture

It’s “disappointing” news, Chancellor Rachel Reeves said. She and the government as a whole have repeatedly said growing the economy was their number one priority.

“I am determined to kickstart economic growth and deliver on that promise”, she added.

But the picture was not all bad.

Growth recorded in March was revised upwards, further indicating that companies invested to prepare for tariffs. Rather than GDP of 0.2%, the ONS said on Friday the figure was actually 0.4%.

It showed businesses moved forward activity to be ready for the extra taxes. Businesses were hit with higher employer national insurance contributions in April.

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The expansion in March means the economy still grew when the three months are looked at together.

While an interest rate cut in August had already been expected, investors upped their bets of a 0.25 percentage point fall in the Bank of England’s base interest rate.

Such a cut would bring down the rate to 4% and make borrowing cheaper.

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Is Britain going bankrupt?

Analysts from economic research firm Pantheon Macro said the data was not as bad as it looked.

“The size of the manufacturing drop looks erratic to us and should partly unwind… There are signs that GDP growth can rebound in June”, said Pantheon’s chief UK economist, Rob Wood.

Why did the economy shrink?

The drops in manufacturing came mostly due to slowed car-making, less oil and gas extraction and the pharmaceutical industry.

The fall was not larger because the services industry – the largest part of the economy – expanded, with law firms and computer programmers having a good month.

It made up for a “very weak” month for retailers, the ONS said.

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UK economy remains fragile – and there are risks and traps lurking around the corner

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UK economy remains fragile - and there are risks and traps lurking around the corner

Monthly Gross Domestic Product (GDP) figures are volatile and, on their own, don’t tell us much.

However, the picture emerging a year since the election of the Labour government is not hugely comforting.

This is a government that promised to turbocharge economic growth, the key to improving livelihoods and the public finances. Instead, the economy is mainly flatlining.

Output shrank in May by 0.1%. That followed a 0.3% drop in April.

Ministers were celebrating a few months ago as data showed the economy grew by 0.7% in the first quarter.

Hangover from artificial growth

However, the subsequent data has shown us that much of that growth was artificial, with businesses racing to get orders out of the door to beat the possible introduction of tariffs. Property transactions were also brought forward to beat stamp duty changes.

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In April, we experienced the hangover as orders and industrial output dropped. Services also struggled as demand for legal and conveyancing services dropped after the stamp duty changes.

Many of those distortions have now been smoothed out, but the manufacturing sector still struggled in May.

Signs of recovery

Manufacturing output fell by 1% in May, but more up-to-date data suggests the sector is recovering.

“We expect both cars and pharma output to improve as the UK-US trade deal comes into force and the volatility unwinds,” economists at Pantheon Macroeconomics said.

Meanwhile, the services sector eked out growth of 0.1%.

A 2.7% month-to-month fall in retail sales suppressed growth in the sector, but that should improve with hot weather likely to boost demand at restaurants and pubs.

Struggles ahead

It is unlikely, however, to massively shift the dial for the economy, the kind of shift the Labour government has promised and needs in order to give it some breathing room against its fiscal rules.

The economy remains fragile, and there are risks and traps lurking around the corner.

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Is Britain going bankrupt?

Concerns that the chancellor, Rachel Reeves, is considering tax hikes could weigh on consumer confidence, at a time when businesses are already scaling back hiring because of national insurance tax hikes.

Inflation is also expected to climb in the second half of the year, further weighing on consumers and businesses.

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Government to announce new scheme as it ramps up AI adoption with backing from Facebook owner Meta

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Government to announce new scheme as it ramps up AI adoption with backing from Facebook owner Meta

The government is speeding up its adoption of AI to try and encourage economic growth – with backing from Facebook parent Meta.

It will today announce a $1m (£740,000) scheme to hire up to 10 AI “experts” to help with the adoption of the technology.

Sir Keir Starmer has spoken repeatedly about wanting to use the developing technology as part of his “plan for change” to improve the UK – with claims it could produce tens of billions in savings and efficiencies.

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The government is hoping the new hires could help with problems like translating classified documents en masse, speeding up planning applications or help with emergency responses when power or internet outages occur.

The funding for the roles is coming from Meta, through the Alan Turing Institute. Adverts will go live next week, with the new fellowships expected to start at the beginning of 2026.

Technology Secretary Peter Kyle said: “This fellowship is the best of AI in action – open, practical, and built for public good. It’s about delivery, not just ideas – creating real tools that help government work better for people.”

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He added: “The fellowship will help scale that kind of impact across government, and develop sovereign capabilities where the UK must lead, like national security and critical infrastructure.”

The projects will all be based on open source models, meaning there will be a minimal cost for the government when it comes to licensing.

Meta describes its own AI model, Llama, as open source, although there are questions around whether it truly qualifies for that title due to parts of its code base not being published.

The owner of Facebook has also sponsored several studies into the benefits of government adopting more open source AI tools.

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Mr Kyle’s Department for Science and Technology has been working on its mission to increase the uptake of AI within government, including through the artificial intelligence “incubator”, under which these fellowships will fall.

The secretary of state has pointed to the success of Caddy – a tool that helps call centre workers search for answers in official documents faster – and its expanding use across government as an example of an AI success story.

He said the tool, developed with Citizens Advice, shows how AI can “boost productivity, improve decision-making, and support frontline staff”. A trial suggested it could cut waiting times for calls in half.

My Kyle also recently announced a deal with Google to provide tech support to government and assist with modernisation of data.

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Joel Kaplan, the chief global affairs officer from Meta, said: “Open-source AI models are helping researchers and developers make major scientific and medical breakthroughs, and they have the potential to transform the delivery of public services too.

“This partnership with ATI will help the government access some of the brightest minds and the technology they need to solve big challenges – and to do it openly and in the public interest.”

Jean Innes, the head of the Alan Turing Institute, said: “These fellowships will offer an innovative way to match AI experts with the real world challenges our public services are facing.”

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