Will the chancellor invest?

George Osborne

Many business leaders who see themselves as cheerleaders for George Osborne's attempts to reduce public spending as a share of GDP, or the value of what the UK produces each year, are concerned about the least ambiguous manifestation of austerity: sharp cuts in public-sector investment.

Their view is that with the economy still in the doldrums (although out of recession) and with the government apparently able to borrow huge sums at record low interest rates, this would be the appropriate moment for the public sector to improve the wealth-generating infrastructure of the UK.

Which is one reason why, according to ministerial sources, the big debate within the coalition government ("debate" may be a euphemism) is whether the chancellor's Autumn Statement in early December should announce a significant increase in public sector net investment.

My understanding is that the Business Secretary, Vince Cable, is strongly in favour of a boost to such capital spending, especially for housebuilding and construction - since these could generate employment relatively quickly. But I am unclear whether the Treasury will oblige.

What concerns the Treasury is that the public sector finances are in worse shape than it expected.

Even if this deterioration can be put down to factors beyond its control, such as a crisis in the eurozone that undermined the UK's economy recovery, it worries that the UK's cherished AAA credit-rating would be endangered if the government's resolve to stem the growth of the national debt was seen to be weakening.

By the way, some economists would argue, per contra, that slashed investment spending has directly contributed to lower growth and worsening public finances - but that is not an argument that the chancellor finds compelling.

What is beyond dispute is that the fall in public sector net investment has been dramatic, from 3.6% of GDP in 2009-10 to 1.8% last year and a forecast 1.4% next year. Which represents a cut of more than 60%.

By contrast, public-sector current spending, on wages and benefits and so on, has been largely flat over the past three years, at a bit more than 42% of GDP.

If austerity has meant anything, its manifestation has been fewer new schools, hospitals and roads.

So some of those who run big private sector businesses say that the chancellor got his priorities wrong: they would have preferred welfare and benefit cuts, rather than slashed investment.

That said, some would see the bosses as hypocrites in their critique - because one of the reasons they are so desperate to see the chancellor revive capital expenditure is that they have collectively been reining in their own investment plans.

As for the party politics of all this, it is quite difficult for Labour to accuse the government of wilful vandalism to the UK's productive infrastructure: the final budget of Gordon Brown's government included projections for reductions in public sector net investment that were only mildly less dramatic that what has actually transpired to date and would have led to bigger cuts next year than George Osborne currently plans.


A government source makes two points to me on public-sector investment.

First that the chancellor will definitely not enlarge the so-called "spending envelope".

That means any increase in investment would have to be funded by bigger cuts elsewhere - which implies there could be welfare reductions to fund more construction.

Second, in cash terms the government is spending a bit over £2bn more per annum on investment than was written into the previous government's plans (my statement that it is spending less relates to investment as a proportion of GDP).

Robert Peston, economics editor Article written by Robert Peston Robert Peston Economics editor

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This column may be a bit quiet for a bit, because I am away from the office.

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  • rate this

    Comment number 215.

    Erm, be brave and accept we have an economy based on debt.

    Not a vote winner, but it's the Jimmy Saville of economics. It happened but no one wants to talk about it until 30 years too late.

  • rate this

    Comment number 214.


    All agreed up to the one point... Is energy inflation-proof?

    A sound currency is not the same as a sound economy...


    Woof! That's poor trolling - you need to work on it

  • rate this

    Comment number 213.

    When anyone talks about public sector investment no one ever mentions building more prisons.If we doubled the size of the prison population that would be another 100000 places and 100000 off the unemployment register.What do you think criminals are doing when they are not behind bars? They are on the dole.

  • rate this

    Comment number 212.

    Obvious (obvious to some?) - the govt should invest in a giant plan 'C' which concerns UK energy policy. Energy - e.g. the 'Mj' unit of energy is the new currency as is better than money as is inflation proof - govt should invest in a UK 'ring of steel energy production, transport, industry, agriculture, utilities' - link them - BORROW £ Trns & go for it because the result - ENERGY - IS £ MONEY

  • rate this

    Comment number 211.

    @189 Friendly
    Do you know if the rule that local authorities cannot reinvest the proceeds of past council house sales in new council houses - instigated by the Tories in the '80s and maintained by numpty Labour - is still in place?

    If so, perhaps we need to get a public campaign going to have it overturned ...

  • rate this

    Comment number 210.

    what will this achieve and who will pay for it

    it stimulates aggregate demand/growth (construction very good at this), creates private sector jobs
    The 2nd biggest welfare cost is housing benefit, rent the houses out to mix of people, eventually net rent income exceeds building cost = profit & in the meantime you save a chunk of housing benefit

  • rate this

    Comment number 209.

    So long as they keep an eye on inflation, UKGov can produce money out of the hat to spend on (or invest in) whatever they like. GO may deny it, he may not even know it, but it's true.

    If you're not part of the EZ & have no intention of joining the EZ, there's no point in acting as if you are.

  • rate this

    Comment number 208.

    @197/198 ComradeOgilvy
    You are of course correct (the basic numbers don't lie) the emphasis on public debt (which was almost entirely acquired by nationalising private bank debt) is a smokescreen for playing politics. The real issue is private sector debt (tho big business is cash rich), Private deleveraging kills demand/growth coupled with (mild) cuts so bouncing along the bottom is no surprise

  • rate this

    Comment number 207.

    if you cut income (welfare/wages/jobs) to fund infrastructure spending then in the short term you're just cutting one source of aggregate demand to fund another. The seperate usefulness/benefit of infrastructure is medium to long term.

  • rate this

    Comment number 206.

    How can there be a need for more borrowing when companies have banked billions of pounds which they haven't the confidence to invest.

    Not only companies but the millions of people who cashed in before the crash and haven't even noticed a recession.

    Confidence is still the issue until the markets and banks are sorted..

  • rate this

    Comment number 205.

    No186 Geoff,
    'Legislation planned'
    It was Wall St and the 'City' that were the pacesetters for financial recklessness.
    As long as the main governing party derives 60% of its income from these sources and are effectively in the pocket of banking lobbyists, effective action against the 'Corporate Scroungers' is as likely as Eric Pickles winning the 100 metres final in Brazil.

  • rate this

    Comment number 204.

    Not done yet (sorry)

    Debt was originally about financing wars and little else. We have a welfare state now. The public sector is a larger proportion of the total economy.

    If debt is measured against GDP, great. Consider the effect on GDP by reducing public spending. Then consider the ratios.

    Cut welfare, shrink GDP... I don't hear talk of the private sector picking up the slack any more.

  • rate this

    Comment number 203.

    No196 John from Hendon,
    It will be a sad day if ever the 'socially useless bankers' are ever allowed again to exert the influence they have had, particularly over the last thirty years.
    A good start would be to let the owners/investors in banks know that the cowardly lapse into 'moral hazard' is over, no more bailouts and living off the backs of taxpayers.

  • rate this

    Comment number 202.

    The best way forward would be to employ ship-loads of builders (ensure they're on PAYE, buy loads of materials and embark on a massive HOUSE BUILDING project.
    Build lots of modestly-sized, but quality homes for social rent.
    Ensure that they can't be sold on for a quick buck and that the rents are affordable to those on average wage and will flow into council/treasury coffers.

  • rate this

    Comment number 201.

    'Depression to last to 2014' (at least - my addition - popb. till 2020 at best)

    I am not surprised by this prediction as I predicted this back in 2008. Still the idiots in charge will not take the steps necessary to pull the economy out of the Depression.

    We must learn the lessons of 1870s Long Depression asap. Deflate debt. Fix Banks. Rates up!

  • rate this

    Comment number 200.

    Your link shows the national debt started with formation of the BoE who 'Lent' the Gov £1.2M @ interest also leveraged to double for other loans.Shareholders only ever deposited circa £800K some of that in the form of tally sticks
    The thin end of the wedge though was Henry VIII relaxing usury laws to fund 2nd wife/break with Rome. So £1Tn debt down to Henry VIII brains being in his codpiece

  • rate this

    Comment number 199.

    So... "Will the chancellor invest?"

    We all know the answer to that. We have all heard the reasons given too.

    Yet this article points out several good reasons to change tack.

    Is the chancellor adhering to sound economic principles? Or is this simply a manifestation of the prevailing orthodoxy?

    Are we all happy with the political options? We can influence tactics, not strategy.

  • rate this

    Comment number 198.

    Re: the national "debt crisis" (see my link at 197):

    Since the early 70's until this current mess, our debt has remained below 50% GDP. That's four decades of low debt.

    So... did Brown really spend recklessly? For that matter, did Thatcher have a major economic impact?

    More to the point, WHAT CRISIS???? The evidence does not support the idea this is a sovereign crisis.

  • rate this

    Comment number 197.


    "We are now faced with having to pay back a huge defeceit."

    Deficit or deceit? Historically, our debt has rarely been lower than it now is.


  • rate this

    Comment number 196.

    177. ToryBoy "fundamental reform"

    I think we need reform. I think it would be very odd to think that we do not need reform, given the disaster that has befallen the capitalist system. But the capitalist system regularly goes through such cathartic shuddering reforms - that is part of the system.

    We need to reform the agents of destruction so that they are prevented from further destruction.


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