Invest in the future

This morning’s Financial Times has a big story on the decline in US public sector capital investment, including some eye-catching graphs. The article reveals that US gross investment has fallen to 3.6 per cent compared to a post war average of 5 per cent.

At first glance you might think this is a curious by-product of a deadlocked congress and crazy anti-state American politics. Not true. The Fabian Commission on Future Spending Choices found that capital investment is close to an all-time low in the UK as well – and lower than in the United States.

This year UK gross public sector investment will be 2.8 per cent, compared to a post war average of almost 6 per cent. Nor is there any sign of the situation improving. On current plans investment will fall to 2.5 per cent by 2016/17. This graph shows the trend since the 1950s, for both gross and net investment (two anomalous years are excluded).

This sustained decline in investment means: less spending on public service infrastructure, like modern healthcare facilities and the new schools required for our baby boom; less money for housebuilding to create the affordable homes we desperately need; and less for economic development, for transport infrastructure, high-speed broadband or state investment banks.

The second graph is reproduced from 2030 Vision and helps explain what’s been going on in recent decades. There’s been a gradual shift from investment (and defence) to ‘social’ spending, on health and social security in particular. A lot of this expenditure is of course desirable, but investment is too.

That’s why the Fabian commission recommended that capital investment should be a top priority for UK public spending after 2015. We said that, even while the deficit is still being closed, an extra £5bn a year should be diverted to capital investment. And over the next twenty years we hope that capital spending can gradually rise towards the levels achieved in the mid 2000s. Just before the financial crisis gross public sector capital accounted for 3.3 per cent of GDP: hardly high by historical standards.

The conclusions of the Fabian commission are summed up perfectly by a quote in the FT story, from a speech made by President Obama in 2008:

“Entitlement spending is bound to increase as the Baby Boom generation retires… But the answer to our fiscal problems is not to continue to short-change investments in education, energy, innovation and infrastructure – investments that are vital to long-term growth.”

In the UK too, we need to grow spending on healthcare and pensions over the coming decades. But we must invest in the future too.