Government knows it cannot shoulder the burden of growth alone

If you asked the chancellor to spell out the mantra of this Labour government, it would be — to borrow from Sir Tony Blair — “investment, investment, investment”.
The string of private sector projects announced at the government-organised summit of the world’s biggest money managers in London on Monday is therefore a clear (and rare) win for an administration that has stumbled through its first 100 days in office.
Money was pledged to a 5GW offshore wind farm project, upgrades to the gas-transmission system and expanding the electric vehicle charging network, to name just a few. These are the types of goods and services that consumers and businesses will rely on to a greater degree as the economy moves toward net zero. They will need continuous investment — from both the public and private sector — but this is a good start.
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A renewed focus in government on boosting capital spending has been cheered by economists. The most commonly cited cause for the economy’s sluggish growth rate since the 2008 financial crisis has been weak investment acting as a drag on productivity.
To arrest that trend, the Treasury must learn to count the gains, as well as the costs, of investment spending, a calculation that has already been fleshed out by the Office for Budget Responsibility.
A recent paper from the spending watchdog claimed: “A sustained 1 per cent of GDP increase in public investment could plausibly increase the level of potential output by just under [0.5 per cent] after five years and around 2.5 per cent in the long run (50 years).”
While Rachel Reeves has signalled that the Treasury will increase public investment spending in the budget on October 30, the government cannot shoulder the entire burden of stimulating growth. It will need the invisible hand of the private sector to help guide it toward that end goal.
Reducing political uncertainty and building on the success of existing subsidy programmes, such as the contracts for differences initiative, can strengthen ties between government and business.
Tomasz Wieladek, chief European economist at the asset manager T Rowe Price, said: “The most important feature of any government investment programme is to provide great certainty that investments will happen. By providing guarantees of funding for these projects, the private sector will contribute at the same time.”
James Smith, developed markets economist at ING, the banking and financial services group, said: “The fact that policy uncertainty is lower than it has been for quite a few years can only be helpful.”
Higher debt servicing costs and an ageing population have weakened the public finances. If Reeves used most of the headroom gained from changing the fiscal rules in the budget, she would draw the ire of the likes of the Institute for Fiscal Studies (IFS), which routinely criticised the Conservatives for running the public finances tight in order to finance tax cuts.
In reality, most of the projects announced on Monday probably would have happened anyway. The government just choreographed them to be unveiled on the same day so it could take some of the credit.
There will be concern, however, about relying on Macquarie for funds to renew the country’s infrastructure. The Australian money manager has been accused of setting in motion the financial difficulties that have engulfed Thames Water by loading it up with debt during its ownership of the utility firm between 2006 and 2017.
Ultimately, more money is required, according to Paul Johnson, director of the IFS, who told Times Radio that the size of investments announced on Monday would be enough “just to keep the economy going”.