£50bn more public spending needed each year for long-term growth – think tank

Spending must rise sharply under the new Government to bring UK public services “up to scratch”, according to a leading think tank.

The National Institute of Economic and Social Research (NIESR) said an extra £50 billion a year is needed for public investment to secure long-term economic prosperity.

This would see public investment rise from its current level of around 2.5% of UK GDP (gross domestic product) to around 5% of GDP.

Stephen Millard, deputy director for macroeconomic modelling and forecasting at NIESR, said, however, that this would require “either higher taxes or higher borrowing or both”.

Last week, Chancellor Rachel Reeves indicated that taxes are likely to be raised in the autumn Budget after she criticised the state of public finances left by the previous government.

Ms Reeves said Labour would stick to its election manifesto promises not to raise national insurance, income tax or VAT, but left open the possibility for other tax hikes at the Budget on October 30.

The admission came after she scrapped a series of infrastructure projects as part of measures aimed at filling a £22 billion black hole in the public finances.

However, NIESR stressed the importance of public investment in areas such as transport connectivity in order to help drive economic growth.

The think tank said the new Government will need to address “low-trend productivity growth, make changes to the current fiscal framework and improve declining living standards”.

Mr Millard said: “The new Government has inherited an economy with low investment and low productivity growth, and it is these issues that need to be tackled.

“In addition, public spending needs to rise if public services are to be brought up to scratch, the nations and regions of the United Kingdom outside London and the South East are to see the regeneration they need, and the government is to meet the mandated target of achieving net zero by 2050.”

The think tank’s latest outlook report predicted that output will grow by around 1.2% per year over the life of the current Parliament, while unemployment is likely to remain around 4.5%.

It also predicted that inflation will tick higher again over the second half of 2024 and start of 2025 but will return to around the 2% target rate in the medium term.

Adrian Pabst, deputy director for public policy at NIESR, said: “The Government’s mission-driven approach and the creation of an Industrial Strategy Council have the potential to overcome barriers to better economic policy-making such as policy and ministerial churn, departmental silos and a lack of co-ordination across Whitehall.

“While these are necessary and welcome steps, they are not sufficient to reduce regional and local inequalities substantially.

“The government needs an overarching strategy to rebuild state capacity, not tinkering at the edges.”