NIESR has long argued that the fiscal rules ? which currently limit public-sector borrowing to 3 per cent of GDP five years out while ensuring that the public-sector debt to GDP ratio is falling at that point ? act as a disincentive to public investment, as in planning public expenditures it forces a trade-off between government consumption and planned public investment. At a time when public investment ? in infrastructure, public services, and the green transition ? is sorely needed in the United Kingdom.
The recently released OBR Discussion Paper on ‘Public investment and potential output’ helps to emphasise our point that well directed public investment can reduce the debt to GDP ratio in the long run by raising the denominator by more than the initial increase in public indebtedness, but that it would most likely take more than the five years focused on by the current fiscal rules to do so.