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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer is the incoming director of the Institute for Fiscal Studies
The cloud of numbers in Rachel Reeves’ spending review obscured the big trade-offs. The chancellor rattled through an investment spree across a number of departments, interspersed with name checks for constituencies that would benefit from specific projects and reminders of all the jobs that would be supported.
We knew that the government would increase investment. It was always a key part of how Labour intended to fulfil their number one mission of driving up economic growth. What we didn’t know was that such a large share — over 60 per cent — of the additional spending would go to defence and net zero.
The focus on these areas might increase growth. But it is a mistake to think that an enduringly higher growth rate — not simply a bigger economy but one that gets larger each year — is an inevitable outcome. Merely building a stock of weapons won’t drive growth. And supporting households to switch to heat pumps just means producing the same thing we already do (warm homes) in a cleaner, and probably more expensive, way.
It is also a mistake to think that investments are growth friendly just because they create jobs. Outside a recession, more jobs in one area mostly means fewer jobs somewhere else. Rather than focus on how much work is needed to get something produced, we should focus on how much output each worker can create. We have a productivity problem, not a jobs problem.
The industrial strategy released last week sets out the investments that aim to position the UK as a leader in sectors identified as having high-growth potential, including defence and clean energy. Targeted investments — especially those that encourage innovation — have the potential to improve growth and steer workers towards more productive areas. But if the government didn’t want more defence capability, would investing in weapons and nuclear submarines, even innovative ones, be the best way to boost economic growth? It seems unlikely.
The government can be more confident that investing in infrastructure and R&D will increase growth. The UK has long underinvested in transport infrastructure relative to other developed economies. Better connecting people and places and incentivising more innovation is a route to higher productivity.
The Department for Science, Innovation and Technology will get a £3.8bn increase in its annual capital budget by the end of the parliament, which should see spending outpace inflation. But the Department for Transport gets just £1.8bn. Falling spending on HS2 will free up resources for other projects, but the overall transport budget is getting a real-terms cut. Both settlements are dwarfed by the extra £14bn going to defence and the £9bn going to the Department for Energy Security and Net Zero.
We should be wary of a narrative that makes it sound as if there are no trade-offs. More investment for defence and clean energy means less elsewhere. As the industrial strategy itself acknowledges, growth is not the only goal. Sir Keir Starmer has other priorities too, and they don’t come cheap.
Having picked the path it wants to tread, the government must now turn its attention to ensuring that all the growth-friendly projects are delivered on time and on budget. That really is a top priority.
The government is keen to trumpet the cumulative £113bn of additional investment that will take place over this parliament, (when compared with plans made by the Conservatives in early 2024). They’re not advertising the additional £140bn of borrowing that is forecast over the same period. Increased government investment makes higher growth more likely. Higher debt and interest payments make growth more necessary.
