Human capital investment is the missing ingredient in the Rachel Reeves’ growth plan
Jim O’Neill
Funding for childcare and the prevention of disease are just two ways the government could stimulate economic growth
Ever since last November’s budget, it’s been clear that this week’s spending review and the parallel unveiling of the 10-year infrastructure strategy would be the real test of this government’s growth mission.
It will also test the fiscal rules, in terms of robustness and whether the chancellor, Rachel Reeves, is really passionate about why she introduced them.
In her budget speech last November, Reeves articulated the case for much stronger public and private investment spending in the UK and explained her rule changes in this context.
So far, there has been repeated attention to the first rule, namely maintaining that current spending must be financed not by borrowing, but out of current taxes. The second rule, much less discussed, concerns borrowing to invest.
Because of the decision to reject the big ways of raising money through tax, the government is constantly being tested by its own forces, the opposition, the markets and the public about the strength of that first rule. It’s been clear that there is unlikely to be any major tax policy initiatives introduced until this November’s budget, nor should there be.
The bigger test of the spending review is identifying new infrastructure projects that will have significant positive multipliers for the economy. And if so, justifying why it might be right to borrow, irrespective of the first rule, to fully, or part, finance these projects. I certainly hope so.
If the government delivers on its industrial strategy, it is likely that forecasters will become more hopeful about UK growth
As for the kind of projects they might include, I would hope that they might include full commitment to Northern Powerhouse Rail connecting all those geographically close cities to Greater Manchester, allowing what I sometimes refer to as “ManSheffLeedsPool” to create an economic zone with a population similar to that of London.
I would also like to see investment into the UK’s “human capital”; for example, on preventive disease and illnesses, which the Office of Budget Responsibility has already demonstrated in its annual long-term debt sustainability report in 2023, would be very helpful for economic growth and debt reduction.
Or investment into early years childcare, which the Institute for Fiscal Studies says can generate substantial financial benefits, often exceeding the initial costs by a ratio of 2:1.
It could, if officials so wished, fall to Nista, a new body made from the merging of the National Infrastructure Commission with the Infrastructure Projects Authority, to demonstrate which ones would give the most bang for the buck to the economy.
The question that often follows is: won’t the UK bond market freak out at this, or indeed, any more borrowing? At a time when global bond markets are concerned about the credibility of the core market, US Treasuries and, to some degree, rising Japanese bond yields, there are no free lunches for governments. But in the US case, it is due to more unfunded tax cuts on top of an already rising fiscal deficit.
The UK urgently needs growth-enhancing investment, from the private and public sector. If those proposed by the government are transparent, and credible in terms of their likely growth benefits, the markets are likely to reward such policies opposed to unfunded current spending or tax cuts.
If the government delivers on Wednesday and on its subsequent industrial strategy, it is quite likely that forecasters will become more hopeful about UK growth. In turn, it’s feasible that UK financial conditions could improve if the UK equity market were repriced to a higher multiple and sterling strengthened further.
Lord O’Neill of Gatley was previously chief economist of Goldman Sachs
Photograph: Jaimi Joy/Bloomberg via Getty Images
Social links
Copyright © 2025 Tortoise Media
All Rights Reserved
This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.