Removing ‘dead hand’ of the Treasury could spur growth

To even the most casual observer of the UK’s public sector procurement performance it must be obvious that something, or more probably things, is seriously wrong. The stop-start approach to bringing HS2 into Central London at Euston station on cost grounds, even though government ministers admit that this will lead to greater long run costs, is not untypical.

The UK’s record on infrastructure investment is lamentable. As well as being too low it is typified by volatility of such an extent that the construction industry and other suppliers have learned that the public sector cannot be relied to do the sensible thing even when it is glaringly obvious.

The evidence mounts that tinkering with the system is not going to produce any solutions; something more root and branch will be needed to effect the neccessary transformation. The Resolution Foundation think tank is the latest in a line of those calling for change. In a report they say Britain’s cycle of weak and highly volatile public investment has left the country poorer, and is so deeply embedded that a complete overhaul of how we make decisions on critical public investment is needed.

The report – Cutting the cuts – the 34th report of The Economy 2030 Inquiry – argues that the UK consistently features in the weakest third of OECD countries in public investment. Had the UK’s levels been at the OECD average over the past two decades, says the report, public investment would have been £500 billion higher (in 2022 prices).

The UK has the most volatile annual growth rate among all OECD advanced economies bar one, with the government on average failing to spend around £1 in every £6 it plans to. A key reason for the volatility is said to be strong political and fiscal incentives to cut public investment when the public finances are under pressure; it has been cut by an average of nearly 20% in each of the post-recession fiscal consolidations that have taken place since the 1970s.

Following the 2019 general election the Government set out plans to raise investment substantially, but this was cut two years later in the wake of Liz Truss’ mini-budget. More than 80% of the planned increases have been reversed.

The Foundation says that this repeated failure on public investment is so great that it represents an institutional failure of the British state, and that our approach to public investment requires policy and institutional change.

A new approach should start by changing the fiscal rules that govern how spending and tax decisions are made, says the Foundation. But that might not be enough; radical institutional change may be needed, such as taking decisions about public investment levels out of the Treasury altogether and placing responsibility on Parliament, setting it through an Act at the start of each parliament.

The Treasury would be left with greater capacity to focus on improving the quality of public investment, by ensuring greater transparency over the business case for particular projects, and setting longer-term budgets for departments, or strategic infrastructure projects such as HS2.

For long the allegedly ‘dead hand’ of the Treasury has been widely blamed for holding back UK public sector investment. The time to lift it off the investment taps might have come.

Nick Barrett