In a challenging fiscal environment characterised by high debt and low growth, Andy Haldane, former chief economist at the Bank of England, recently outlined a potential way forward for the UK economy: grow, rather than cut, its way out of debt.

 

Haldane points to a historical under-investment in essential areas like technology, infrastructure, and human capital, which has left the UK’s capital stock per worker lagging behind other advanced economies. This “capital gap” is estimated at £1.6 trillion, or around £35 billion per year on current figures, and highlights the scale of investment needed to boost productivity and competitiveness.

 

Investment as a path to growth

 

While addressing high debt often leads policymakers to reduce spending, Haldane contends that scaling up investment could lead to long-term economic benefits. According to the UK Office for Budget Responsibility (OBR), a consistent 1% increase in public investment relative to GDP could raise the UK’s potential output by around 2% within 10-15 years.

 

Such investment could also generate a positive return exceeding borrowing costs, suggesting that the growth it generates would more than offset the initial expense. Haldane proposes a target of £100 billion per year in additional public investment, equivalent to around 4% of GDP, to bridge the capital shortfall.

 

The limits of debt-based fiscal rules

 

Currently, the UK's fiscal rules are heavily debt-focused, prioritising short-term debt reduction over long-term growth. This approach requires cutting public investment from 2.5% to 1.7% of GDP over the next five years, a move that could further hinder economic growth. Historical evidence shows that economies rarely achieve growth while reducing public investment from already low levels.

 

Haldane suggests that the UK's fiscal framework should recognise the long-term returns of infrastructure, housing, and education investments to avoid this. Extending the evaluation period for fiscal rules from five to ten years would also allow for more significant, impactful investments without jeopardising immediate debt targets.

 

Measuring public sector net worth

 

Haldane also advocates shifting the UK's fiscal focus from gross debt to public sector net worth, which takes into account both the government's assets and liabilities. This approach would help justify investments in illiquid, long-term assets that generate income, attract private sector growth, and stabilise the economy.

 

Evidence from international markets indicates that countries with rising net worth experience better borrowing conditions than those focusing solely on gross debt. Investors are reassured by economic policies that boost productivity and asset values, and Haldane suggests that emphasising net worth would ultimately strengthen the UK's borrowing position.

 

Implications for the upcoming budget

 

With the UK's upcoming Budget, policymakers have an opportunity to implement these changes. Many are urging the Chancellor to pursue a growth-oriented strategy, which would create up to £50 billion in additional fiscal space each year. This could make significant investments possible, addressing both the UK's productivity challenges and its debt concerns. A long-term investment approach would also benefit key industries like technology and renewable energy, boosting competitiveness on the global stage and setting the UK up for sustainable growth.

 

Is public perception an obstacle to change?

 

Some parties have expressed concern that public perception could be a significant obstacle to change, especially regarding government debt. The idea that governments simply change the rules to suit their cause is not uncommon, but in this instance, it may be a little wide of the mark. There is a growing belief that the UK’s debt management criteria are outdated and too focused on debt alone, providing data for just one side of a complex financial equation while ignoring assets.

 

Summary

 

Haldane argues that the UK’s focus on short-term debt reduction limits its growth potential, advocating instead for increased public investment in infrastructure, education, and technology. By shifting to a fiscal policy based on net worth and extending investment horizons, the UK could increase productivity, leading to private sector growth, and ultimately reduce debt ratios over time.

 

Could this growth-driven approach really set the UK on a path to sustainable economic health?

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