How can we make fiscal decisions that work for the people?

The UK is stuck as a low-investment country. Both state and private investment have continually failed to reach the levels of other countries in the G7 or OECD. This has real impacts. The concrete in our schools is crumbling. We are off track to reach net zero. The poor connections between and within our towns and cities are holding back growth and opportunity. But capital requirements across the economy are only growing as we fail to address historic underinvestment, climate change threatens resilience, and new political or policy goals are layered on top of already creaking infrastructure.  Without tackling this the UK risks being cast adrift from other countries, unable to compete.

Yet neither government nor the opposition are currently squaring up to this challenge, and how to deal with it. The next parliament will not be able to solve all these spending needs, but it must make a start. That creates choices, both in what to fund and how to do it. In order to boost investment, Governments have three options: they can incentivise the private sector to invest more, invest more themselves through higher borrowing or taxes, or cover costs through higher consumer bills. 

We need a more politically robust way to make fiscal interventions and start tackling the UK’s underinvestment.

The public wants clear plans. In addressing huge and diverse capital requirements, there is a need to focus. That means picking clear goals, for example decarbonisation or increasing connectivity. Political parties need to focus on selling the product, not just its price tag. Even within those goals there will be choices; different spending lines will have different economic and political outcomes. Solidifying wavering votes before the election means providing the public with these priorities.

The public want action more than they fear borrowing. Our focus groups found the public quickly rationalises borrowing and government spending as necessary to achieve the change they’re after. Borrowing to invest in infrastructure is supported by 39% with 38% opposed, rising to 46% vs 33% for those intending to vote for Labour. 

This means a focus on year one. With a clear, limited set of goals the next government can spell out to the public what it wants to invest in. Bringing the time horizon closer for voters makes credibility easier and prevents accusations of over-promising. Year one is also important fiscally – choosing the right projects can mean more headroom later. Building credibility and if pay off is fast, fiscal headroom allows politicians to be more ambitious later. High potential options with short turnarounds include decarbonising transport and some urban public transport projects. These must sit alongside vital areas of investment to reduce emissions notably home energy. 

Fiscal policy needs to underpin better decisions. Our current fiscal rules aren’t fit for purpose. They are both too tight, not allowing room to invest, and too loose, with a timeline that is never hit. The Office for Budget Responsibility (OBR), unlike other independent agencies such as the Climate Change Committee, doesn’t ask for evidence on how fiscal pledges will be met. While it may be sensible, politically, for Labour not to bind itself to implausible Conservative spending plans, beefing up the OBR’s remit could help prove that the plans are implausible.

Read the full report here