The looming Budget feels like one of the most consequential ‘fiscal events’ in decades, both for the future of the country and the new Labour Government.
Ok, the Liz Truss “mini Budget” proved to be pretty consequential for her, the country and my mortgage payments, but it’s hard to remember a Budget that has had as long a build-up with as many expectations as the one coming on 30th October.
The long build up has created a vacuum, which has been filled by scaremongering and speculation. Whilst there was an initial economic assessment and uncovering of a £22bn blackhole, we are nearing the end of the 4th month of the new administration and, despite lots of policy announcements, consultations and promises of reform, we are still waiting to see the financial framework that will shape and deliver this Government’s missions.
The Chancellor has consistently emphasised the tough choices she must make to balance the books and set the UK on a path to growth. As Westminster watchers know that there are significant cuts baked into public spending from Jeremy Hunt’s last Budget in March 2024, causing the IfG to call the spending plans “bleak” and “impossible to deliver”.
The Government faces unenviable choices, with ‘growth’ the mantra it needs to find cash to invest now, whilst cutting spending in some areas, raising taxes and simultaneously setting the course for public services to improve over the course of the parliament.
It looks like an impossible balancing act, and one fraught with political difficulties. Rachel Reeves needs to navigate a careful course – unlocking capital spend whilst maintaining investor and public confidence, getting it wrong could be disastrous for her and for the fledgling government.
However, they also have a huge opportunity.
Whilst the media have focused on the changes to the fiscal rules and what they mean politically, this Budget represents a chance to reset our approach to capital investment – one that has led to chronic under-investment in capital dating back to the 1980s.
I have written before about the pernicious analogy that a country’s finances are like a household, popularised by Thatcher’s promise to manage the nation’s finances like a “good housewife”.
It’s a nice piece of rhetoric but it’s deeply flawed and has led to a paralysis in investment that has undermined economic growth and productivity.
And, just to be clear, even with a household it’s fundamentally untrue. Almost every household makes long-term capital investments outside of their current spending when acquiring assets – very few people are buying a car or the very house that contains this whole concept in cash up front, they are financed over years to recognise the long-term value the asset will deliver.
UK Investment compared to G7, IPPR
If people are wondering why the NHS isn’t working, this is part of the problem.
Why do our trains run late? Under-investment in capital.
Roads full of potholes? Capital investment.
The problem with capital investment is that if you ignore it for say, 40 years, then you have an awful lot of ground to catch up on. And that doesn’t mean shiny new projects, that means repair and restoration of assets that have degraded over time. I.e. potholes.
Labour has a generational opportunity to change this. Any business (or household) understands that investing in assets pays off over the long term and, as long as you can afford the debt repayments, makes good financial sense, we need the country to come to the same pretty darn obvious conclusion.
That doesn’t mean borrowing willy-nilly for vanity projects (Boris’ £335bn bridge to Northern Ireland, anyone?), but it means setting out a clear plan and investing in the capital that will deliver it by driving growth and productivity.
Labour has that framework with its 5 missions, so it needs to be bold now and commit to a new wave of capital investment, much of which won’t pay off until after the end of this parliament.
The Conservatives have a role to play here too. It will be easy to attack the change to fiscal rules or increase in borrowing to score cheap political points, but it would be misguided and a repeat of the negative cycle that has got us to this point in the first place.
To get the country growing again, we need to drive productivity, to drive productivity we need to get more people working and moving around. The backlog of investment needed after 40 years of neglect is colossal and cuts across every sector.
The NHS has fewer scanners than any other comparative country, whilst the NHS estate has a £11.6 billion maintenance backlog – more than half of which is deemed to be potentially life-threatening.
Source: King’s Fund analysis of OECD data
In London, supposedly one of the leading cities in the world, TfL hasn’t had a funding settlement of longer than 12 months since 2022, meanwhile, the Bakerloo line runs trains that are 52 years old (the oldest trains in passenger service in the country) and the Central Line rolling stock suffers from go-slow orders due to failing 30-year old engines that are beyond their operational lifespan.
In the North, a recent Centre for Cities report estimated that 4 million people living in Manchester, Leeds, Sheffield, Liverpool, and Newcastle cannot travel to their city centres via public transport within 30 minutes.
In areas like Cambridgeshire, home to a cluster of universities and innovative science and technology businesses, we cannot build in-demand new housing due to shortages. As an aside, we last built a reservoir in the country in 1992, since then the population has grown by more than 10 million.
In this context the Budget represents not just a vital political moment for the Labour government, but also a generational opportunity to change our attitude to capital investment.
If we don’t seize it now, potholes will be the least of our concerns.
