Headline issue

The new UK Government under Prime Minister Theresa May has committed to boosting UK productivity, to addressing the widening wealth gap, and to supporting the transition to low-carbon economic growth. Achieving all this will require the right investments by both the public and private sectors, particularly in sustainable infrastructure, at a time of heightened economic uncertainty. This is the first of two policy briefs that seeks to address this issue by considering whether money is available for such investments, particularly in light of the referendum vote to leave the European Union (EU) on 23 June 2016. An accompanying brief considers institutional reforms to promote long-term investment utilising private capital and to what extent such investments need to be focused on sustainable infrastructure.

Key findings

  • UK productivity levels still lag behind the United States, France, Germany and Italy. Weak productivity growth has meant that even though UK unemployment has remained low since the financial crash, real wages have fallen. A common feature underlying these factors is a shortfall in UK investment.
  • The Government has the opportunity to borrow at historically low interest rates and invest in infrastructure with a positive social return. This would have no net cost because public expenditure creates assets e.g. roads, railways, broadband networks, schools, hospitals or power networks, all of which can be set against public debt.
  • There is strong evidence to suggest that returns generated on well-managed, carefully selected public investment projects are likely significantly to exceed their financing costs. As well as boosting economic growth, this offers the Government the opportunity to capture the returns and service its debt
  • An enhanced infrastructure programme could deliver increased returns to savers; give monetary policy-makers breathing space in seeking new ways to boost demand; reduce the risk of destabilising asset price bubbles (e.g. London property); limit net job losses; limit the widening in income inequality and boost growth without stimulating inflation, while at the same time securing fiscal sustainability.
  • So long as fiscal discretion is constrained by public borrowing over the economic cycle for investment only, debt sustainability can be secured. What constitutes the appropriate level of public debt to finance infrastructure ought to be the subject of an extensive public study. This should be carried out as soon as possible by the Office for Budget Responsibility, in collaboration with the National Infrastructure Commission.
  • The case for publicly funded infrastructure investment has been strong for some time, but the post referendum economic scenario presents a special opportunity to reduce the investment uncertainty arising from the UK’s decision to leave the EU and reduce growing macro-economic imbalances. This policy brief concludes that there is a general macroeconomic case for accelerated infrastructure investment now which will fully pay for itself in the long run.
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