‘Low growth, low productivity, low ambition: the budget needs to tackle the real problem’ – LabourList

The economic backdrop to this week’s Budget is troubled, to put it mildly. Inflation remains persistently high while growth – Rachel Reeves’s holy grail – is stubbornly low. To make matters worse for the Chancellor, the Office for Budget Responsibility is widely expected to downgrade its productivity forecasts, reflecting the UK’s dismal productivity growth since the Global Financial Crisis and bringing it more in line with other forecasters. 

This matters for the Chancellor because a productivity downgrade would reduce the size of the gap between the government’s self-imposed fiscal rules and its actual tax and spending plans. Predictions of the scale of the downgrade vary, but the expectation is that it will wipe out this so-called ‘headroom’ and leave the Chancellor at risk of breaking her ‘iron-clad’ fiscal rules – something she’s repeatedly ruled out. That has left Reeves looking at tax rises to stay within the rules she has set herself, and to build up a bigger buffer to reduce the risk of being in the same position again next year. 

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There’s no doubt that the Chancellor is in a challenging position, or that there is a strong case for progressive tax reform. But amid the frenzied pre-Budget speculation about tax rises, spending cuts and ‘headroom’ we’ve lost sight of the bigger picture. The real question isn’t what taxes should rise to respond to the OBR’s productivity downgrade – it’s why productivity growth is so low to warrant a downgrade in the first place. 

In the UK, output per hour – a key measure of productivity – has grown by just 0.5% a year since the 2008 crash, compared to an average of 2% a year before it. This anaemic productivity growth has seen us fall even further behind other advanced economies like Germany and the USA.  

What’s the cause of this productivity problem? A key driver is a long-running lack of public investment. The Chancellor herself has recognised this.  In a speech earlier this month she identified “the chronic stop-go cycle of public investment … and long-term failure to invest in our regions” as “the causes of our economic underperformance.” 

And the figures don’t lie. New research shows that if the UK had invested at the same rate as the average OECD country between 1995-2024, we would have invested £550 billion more. Cuts to public investment by Coalition and Conservative governments from 2010 onwards were particularly painful, because historically low interest rates meant the government could have borrowed to invest at almost no extra cost. 

This £550 billion ‘public investment gap’ means workers in the UK’s factories, hospitals, construction sites, warehouses and offices are often reliant on more out-dated infrastructure, machinery and software than their counterparts abroad. It’s no wonder productivity has suffered.

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If the UK is to escape the doom loop of low productivity, low growth and falling living standards, it needs to ramp up public investment. This government has taken a step in the right direction, committing an extra £120 billion to public investment at last year’s Budget and the Spending Review earlier this year.  But that was only enough to reverse the cuts planned by the last government. In fact, this additional investment was frontloaded, meaning overall public investment will actually fall towards the end of this Parliament. That’s a recipe for decline or at best stagnation, not the decade of national renewal voters have been promised. 

This is a long-running problem that can’t be fixed overnight. But new analysis from the Invest in Britain campaign shows how we can close the investment gap with other countries and turn the UK economy around. Investing an additional 2% of GDP – or £60 billion – per year would catch the UK up to the OECD average within ten years. 

That extra 2% would also create an economic dividend. After 10 years GDP would be almost 7% higher, increasing the size of the economy by almost £250 billion compared to current projections. Average earnings would be over 4.3% higher too – more than £1,800 per person per year. Fiscal sustainability would also improve, as higher growth gradually causes the debt-to-GDP ratio to fall. That looks a lot more like a decade of national renewal.

There’s no pretending this isn’t a lot of money. But a problem as big and as important as the UK’s low productivity requires an ambitious solution. And there are simple changes to the UK’s fiscal framework that could enable increased investment by capturing more of its long-term economic benefits – for example by extending the time horizon by which debt must be falling as a share of GDP from three years to ten years. 

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Rather than just focusing on the OBR’s downgrade and scrambling for short-term tax fixes, this week’s Budget should confront the underlying cause of the UK’s economic malaise – years of chronic underinvestment. Until we commit to a sustained, long-term increase in public investment that boosts productivity and supports higher growth, we will remain stuck treating the symptoms of a sick economy instead of curing the disease.

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