This week’s UK Budget is the first under a Labour administration in more than 14 years, and to describe it as ‘closely watched’ would be something of an understatement. According to standardised OECD estimates, UK government spending (‘disbursements’) exceeded UK government receipts by some 5% of GDP last year. While recognising the fragility of the UK public finances, the Labour government appears keen to borrow to raise capital spending. In our view, this is rightly so. Over the past five to ten years government capital spending as a share of GDP has been running at around half the levels seen during the 1970s, our chart shows. More broadly, in terms of total investment (both public and private) the UK has been at the bottom of the G7 league table for 28 of the past 45 years, which may explain a good deal of the UK’s poor productivity performance, relative to its peers. But the notion of ‘tax and spend’ is politically charged, and economists differ on the likely impact on the economy. In a recent paper, Sebastian Gechert and Ansgar Rennenberg surveyed close to 100 journal articles containing empirical estimates of the ‘fiscal multiplier’ — put simply, the change in GDP that one might expect following an increase in government borrowing, as a multiple of that increase in government borrowing. They concluded that the headline multiplier was statistically significant and close to one. An increase in government spending would, on average, raise economic activity by more than a reduction in taxation; with an increase in government capital spending having a particularly large multiplier, which was statistically significant and greater than one. It is likely that the well-signalled increase in taxes in this week’s budget will grab most of the headlines. But it is worth digging into the detail, and looking at the government’s plans for capital spending, before forming a view on the budget’s long-term economic consequences. 
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The views expressed in this article are the views of the author, not necessarily those of LSEG.
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