Government needs to spend additional £20bn on infrastructure each year

The Government should spend an additional £20bn on infrastructure investment each year and establish a German-style publicly-owned National Investment Bank, according to a prominent progressive think tank.

The Institute for Public Policy Research (IPPR) will make the recommendation later this week.

Increasing investment spending by £20bn by 2021-22 would lift UK government investment as a share of GDP to around 3 per cent of GDP, which would be the highest for the UK since the financial crisis but still only roughly level to the OECD average.

The Bank of England raised interest rates earlier this month to 0.5 per cent on the basis of its view that there is virtually no longer any non-inflationary slack left in the British economy and that, without a higher cost of borrowing, price rises risks getting out of hand.

But the co-author of the IPPR report, Michael Jacobs, disagrees with the Bank and argues that there remains spare capacity in the UK, which ramped up investment spending from the state can help fill.

“The brute fact underlying our low productivity and investment rate is that the economy suffers from deficient demand. With businesses not investing enough, only the Government can take up the slack,” he argues.

Mr Jacobs also argues that with UK government borrowing rates on the market still negative in inflation-adjusted terms ministers have a golden opportunity to invest cheaply.

“At current negative real interest rates, next week’s Budget is the moment to increase public investment. It will pay for itself in higher growth and tax receipts,” he says.

The IPPR recommends that “much” of this funding could be delivered through a new publicly-owned National Investment Bank, modelled on Germany’s successful Kreditanstalt für Wiederaufbau, which helped to rebuild the infrastructure of that country after the devastation of the Second World War.

The proposals for considerably higher public infrastructure spending and the establishment of a new public investment bank were in Labour’s June manifesto.

But the IPPR argument also chimes with calls made recently by the Communities Secretary, Sajid Javid, for the Chancellor to borrow considerably more in order to spend on the delivery of more housing.

An Economic Justice Commission run by the IPPR – to which this work on infrastructure will feed into – published an interim report in September which said Britain’s existing economic model was “broken”.

It’s members include Sir Charlie Mayfield of the John Lewis Partnership, Jurgen Maier, the boss of Siemens UK, the McKinsey managing partner Dominic Barton, the economist Mariana Mazzucato and the Archbishop of Canterbury, Justin Welby.

The Commission’s final report will be published in the autumn of 2018.

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