Rachel Reeves must ensure increased investment is spent well – here's what she can do

Pre-budget briefing suggests that Rachel Reeves is planning to announce a new set of fiscal rules that would allow her to ramp up public investment.  

If these briefings are accurate, then the chancellor will use her first fiscal event to argue that higher investment is key to achieving the government’s mission to improve economic growth: extra investment now will pay off over the longer-term, ultimately strengthening the economy and the public finances.

There is merit to this argument. Internationally, the UK stands out for its low levels of both public and private sector investment, and the plans inherited from Rishi Sunak’s government imply further cuts to public investment over the next few years. ¹² https://www.ippr.org/articles/rock-bottom  The adverse consequences, for example in public services like hospitals and prisons, are clear. ¹³ https://www.instituteforgovernment.org.uk/publication/capital-spending-public-services  A recent report from the Office for Budget Responsibility (OBR) also found that public investment does, on average, modestly improve economic growth over the long term. ¹⁴ https://obr.uk/public-investment-and-potential-output/

But it is too simplistic to think that all investment is automatically good and will necessarily enhance growth. Projects can be bad value for money, or poorly delivered, or public capital might crowd out private investment rather than encouraging more of it. To reassure markets and the public, the government has already proposed some changes to how investment decisions will be made, including a new 10-year infrastructure plan. These are welcome, but to ensure value for public money is genuinely improved, it should make institutional reforms to change how projects are chosen and delivered.

The government should be targeting better investment, not just more  

The recent history of UK public investment is chequered, with several examples of high-profile projects that have cost substantially more, and taken much longer to construct, than originally planned. IfG research has identified persistent problems with the processes by which capital is spent, all of which can make investment worse value for money.  

Governments too frequently change their investment plans, with overall capital spending cut, increased and then cut again several times over the past few decades. This also applies to individual projects, which have often been re-scoped as political priorities change. Both types of uncertainty make it hard for the private sector to plan and invest in staff and production capacity, increasing delivery costs and creating delays.

Major programmes have also often been committed to too soon, before they have been adequately scoped, and initial plans are often subject to optimism bias. This reflects politicians’ desire to announce exciting new projects, and a tendency to try to make projects look like better value for money at spending reviews by underestimating costs.

Departmental investment budgets are often managed ineffectively. In public service departments in particular, budgets are often underspent by large margins, and a large fraction of budgets is rushed out of the door in the final month of the financial year, casting doubt on the value for money of that spending. Governments have also tended to neglect maintaining existing assets adequately, particularly when budgets are tight.

The government must ensure its 10-year infrastructure plan is credible

It is welcome that the government has committed to publish a 10-year infrastructure plan, which could provide much needed clarity around the government’s investment ambitions, especially if it is accompanied by a realistic and firm pipeline of projects which the private sector can prepare for.

Reports suggest that the plan will not only cover economic infrastructure, like transport, but also at least some social infrastructure, like schools. ¹⁶ https://www.newcivilengineer.com/latest/treasury-details-10-year-infrastructure-plan-and-new-delivery-body-to-be-launched-in-spring-10-10-2024/#:~:te…  This is especially welcome, as our research has pointed to several benefits of a comprehensive long-term plan for capital investment in schools, hospitals and prisons. Where there is broad political consensus about the future delivery model for these services and the need for good infrastructure to support that, it makes sense to set the longer-term plan out clearly.

The previous government also had its own infrastructure pipeline, but this failed to provide the desired certainty to the private sector as ministers tinkered with both overall spending and specific projects. The new pipeline must give the private sector the certainty it needs to make decisions, and it should be updated to reflect new projects – which would provide new momentum – rather than just list the projects already agreed.

The government can do more to improve how it invests

The 10-year plan alone will not ensure investment budgets are well spent, so the government should also make changes to its internal processes. It is reported that the new National Infrastructure and Service Transformation Authority (NISTA, a merger of the National Infrastructure Commission and Infrastructure and Projects Authority) could take on a greater role, and this could include more involvement in the process of scoping and developing major projects, scrutinising infrastructure bids at spending reviews, and a responsibility to ensure departments follow the ‘Construction playbook’ best practice when procuring projects.

The government should also improve the transparency of capital project decision-making, as better external scrutiny would help to identify problems earlier. It should ensure that merging the NIC into NISTA, a central government organisation, does not mean the loss of a valuable independent voice scrutinising government infrastructure plans, and it should also deliver on the Treasury’s previous commitment to publishing business cases for major projects. There are also steps the Treasury can take to align civil service incentives, such as reforming the responsibilities of accounting officers so they are held to account for underspends as well as overspends and for the maintenance of the assets in their portfolio.

The government has a good case to make for more investment. A more stable, consistent and transparent approach to spending decisions and project delivery will make that case stronger and help ensure that additional spending will deliver what the government is promising.