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The author is the next director of the Institute for Finance.
The numbers cloud in Rachel Reeves’ spending review blurred the big trade-offs. The Prime Minister has hampered investment across many sectors where name checks for districts that benefit from specific projects are scattered and reminders for all supported jobs.
I knew the government would increase investment. It was a key part of how labor was intended to fulfill its number one mission to promote economic growth. What we didn’t know was that over 60% of the additional spending would go to defense and net zero.
Focusing on these areas can increase growth. However, it is a mistake to think that permanently high growth rates are not merely an economy, but an inevitable outcome of an economy that grows every year. Building weapon inventory alone does not drive growth. And supporting households to switch to heat pumps means producing the same thing we already do with cleaners (warm homes), and perhaps a more expensive way.
It is also a mistake to think that investment is growth-friendly simply because it creates jobs. Outside of the recession, having more work in one area means that there is less work in most places somewhere. Rather than focusing on the amount of work needed to produce something, you should focus on the amount of output that each worker can create. It’s not a job issue, it’s a productivity issue.
The industrial strategy released last week shows investments aimed at positioning the UK as a leader in a sector identified as having high growth potential, including defense and clean energy. Targeted investments, particularly those that encourage innovation, can improve growth and lead workers to more productive sectors. But if the government doesn’t want more defensive capabilities, is investing in weapons, nuclear submarines, and even innovative submarines the best way to boost economic growth? It doesn’t seem like it will happen.
Governments can be confident that investment in infrastructure and R&D will drive growth. The UK has long been less invested in transportation infrastructure compared to other developed countries. Better connecting people and places and fostering more innovation is the route to higher productivity.
The Ministry of Science, Innovation and Technology should see an annual capital budget of £3.8 billion by the end of Parliament, surpassing spending inflation. However, the Transportation Bureau has only won £1.8 billion. The decline in spending on HS2 frees up resources for other projects, but the overall transportation budget reduces real speeds. Both settlements are warned by £9 billion of £9 billion for additional defense and energy security and net zero.
You need to be aware of stories that sound like there are no trade-offs. More investment in defense and clean energy means less elsewhere. As industrial strategy itself acknowledges, growth is not the only goal. Keir Starmer ir also has other priorities and they are not cheap.
With the choice of paths to step on, the government must now turn its attention to ensuring that all growth-friendly projects are delivered within time and budget. That’s really a top priority.
The government wants to trumpet the additional investment of £113 billion in cumulative cumulative £113 billion in parliament (compared to plans made by conservatives in early 2024). They are not advertising additional £140 billion borrowings projected for the same period. Increased government investment will result in higher growth rates. The higher your debt and interest payments, the more you need to grow.
