A coalition of leading economists is calling on UK Chancellor Rachel Reeves to revise her fiscal rules in the upcoming October budget to facilitate greater public investment in the country’s deteriorating infrastructure. In an open letter to the Financial Times, eight prominent economists, including former civil service head Gus O’Donnell and ex-Goldman Sachs chief economist Jim O’Neill, have emphasized the urgent need for a significant increase in government spending.
The economists argue that the UK’s “decade of national renewal,” as envisioned by Labour, will falter if the government does not boost its investment in public services. They criticize current investment cuts made under the guise of fiscal prudence, claiming these have eroded the foundations of the economy and compromised long-term fiscal sustainability.
“The challenge of revitalizing the UK’s crumbling public services cannot be met by the private sector alone,” the letter asserts. “It requires a step change in levels of public investment.” To achieve this, the economists recommend that Reeves overhaul both her fiscal rules and the broader mandate of the Office for Budget Responsibility (OBR), the government’s fiscal watchdog.
Currently, Reeves’ fiscal rules stipulate that borrowing is only permissible for capital projects and that national debt must decrease as a percentage of GDP within five years. However, with national debt nearing 100% of GDP and projections suggesting it could reach 270% within 50 years, the constraints of these rules are seen as overly restrictive.
The call for reform comes as Labour prepares to unveil its first budget since winning power in July. Reeves has flagged a £22 billion shortfall in public finances and has warned that the budget will be “painful” due to the severe fiscal legacy from the previous Conservative administration. The Resolution Foundation think tank has projected that £19 billion in additional spending is necessary to restore public services to normal levels, with further investments required for areas like hospitals, prisons, schools, and transport.
The economists emphasize the need for a revised approach that acknowledges the long-term benefits of increased public investment. They argue that the current fiscal framework fosters short-term thinking and creates an inherent bias against investment.
“The current fiscal framework has helped to drive this short-term thinking and created an in-built bias against investment,” the letter notes. “A more responsible approach, which better reflects the significant long-term benefits of increased public investment, will require changes to our fiscal rules and to the mandate for the OBR.”
The OBR’s mandate, which operates on a five-year horizon, has been criticized for not fully capturing the long-term gains from infrastructure investments. According to a recent OBR report, while the benefits of such investments are modest over a short-term horizon, they become significantly more attractive over a longer period.
The letter was signed by a distinguished group of economists, including Anton Muscatelli, chair of the Royal Economic Society; Simon Wren-Lewis, emeritus professor of economics at the University of Oxford; Jonathan Portes, professor of economics and public policy at King’s College London; and Susan Newman, head of economics at The Open University.
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