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Sir Keir Starmer has cleared the way for a big increase in capital spending at next month’s Budget, as his government won the backing of the Paris-based OECD for reforms to boost growth-enhancing public investment.
Speaking in New York, the prime minister said he wanted government spending to act as a “catalyst” to private investment, and signalled he believed the UK’s fiscal rules should be designed to aid capital spending. “I’ve always thought that we should borrow to invest,” he said.
Chancellor Rachel Reeves will set out revised fiscal rules at the Budget on October 30, with Whitehall insiders saying she wants to ensure they do not stop billions of pounds being invested in areas such as the green energy transition, roads and hospitals.
Before the election, Starmer slashed Labour’s flagship green spending plan from £28bn annually to just £4.7bn a year because of the fragile state of the public finances. Some of those cuts could now be reversed.
Starmer insisted there was a difference between borrowing to fund day-to-day spending and using public debt to finance investment, which he said could help grow the economy.
Speaking on the margins of the UN General Assembly, he told the BBC: “Borrowing and public investment have to come alongside private investment, to be a catalyst for it.”
His comments came as the OECD, a think-tank for 38 mostly rich countries, urged the UK to rewrite its “short-termist” fiscal rules to allow higher public investment that would drive growth.
Alvaro Pereira, the OECD’s chief economist, said the fiscal rules could lead to “the deterioration of the public finances in the long run”, given the need to improve Britain’s infrastructure and boost productivity.
The existing rules are based on a rolling five-year horizon, which Pereira said gives ministers an incentive to delay cuts in day-to-day spending but makes it hard to justify long-term investment.
Reeves paved the way for higher capital spending during a speech at the Labour party conference on Monday, in which she vowed to end the “low investment that feeds decline”.
Government officials are considering a range of options to loosen constraints on investment imposed by the existing fiscal rules, which require debt to fall as a share of GDP in five years’ time.
Reeves wants the Treasury to better recognise the benefits of investment, rather than primarily the costs.
As part of this, officials are examining alternative measures of the government balance sheet that reflect the assets created via investment, and not just the liabilities.
IMF researchers have argued that gauges of the government finances such as public sector net worth are more “conducive” to investment.
Another metric under examination in the Treasury is public sector net financial liabilities, which counts a wider range of assets than the existing government debt gauge, potentially substantially increasing budgetary headroom.
The government also wants to better reflect the assets of state investment vehicles such as its national wealth fund and Great British Energy, as well as their liabilities, or to shift them off the official balance sheet.
However, economists stressed the government will need to be cautious about how much extra borrowing capacity it uses for investment given the need for it to maintain the confidence of financial markets.
The government is also heavily constrained by its other main fiscal rule, which requires it to balance the budget when investment is stripped out.
Pereira made his comments as the OECD published new forecasts for growth in major economies that showed the UK among the stronger performers.
The OECD expects Britain’s GDP to expand by 1.2 per cent in 2024 and 1 per cent in 2025.
However, inflation is likely to prove stickier in the UK than in any other G7 economy on the OECD’s projections, averaging 2.7 per cent in 2024 and 2.4 per cent in 2025.
The OECD said global GDP growth had remained resilient and was set to stabilise at 3.2 per cent in 2024 and 2025.
