Rachel Reeves warned that cutting investment would damage ‘foundations of the economy’ – business live

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A group of leading economists are today urging chancellor Rachel Reeves to tear up the UK’s fiscal rules in next month’s budget, to allow the government to borrow more to fix the country’s public infrastructure.

In a letter published this morning, the group warn that under-investment has led to a “vicious circle of stagnation and decline” in Britain, weakening the economy and creating greater social and environmental problems.

Reeves, they fear, risks repeating “the mistakes of the past” by sticking with spending plans set by the previous government that imply substantial real-terms cuts in public investment over the current parliament.

They warn:

We do not see how the planned “decade of national renewal” can take place if these cuts are delivered.

To follow through on these plans would be to repeat the mistakes of the past, where investment cuts made in the name of fiscal prudence have damaged the foundations of the economy and undermined the UK’s long-term fiscal sustainability.

The letter is signed by Lord Gus O’Donnell, former Cabinet Secretary, Lord Jim O’Neill, former Commercial Secretary to the Treasury, professor Mariana Mazzucato of University College London, Mohamed El-Erian, former chief executive of Pimco, Sir Anton Muscatelli, chair of the Royal Economic Society, Professor Simon Wren-Lewis emeritus professor of Economics, University of Oxford, Professor Jonathan Portes, professor of Economics and Public Policy at King’s College London, and Professor Susan Newman, head of economics at The Open University.

The eight put their finger on the problem: The UK government’s current debt rules create an “inbuilt bias” against investment, by forcing ministers to show debt will fall as a share of the economy at a five-year horizon.

In their letter, published in the Financial Times, they say:

A more responsible approach, which better reflects the significant long-term benefits of increased public investment, will require changes to our fiscal rules and to the mandate for the Office for Budget Responsibility.

Reeves’s other fiscal rule is that government can only borrow to invest in capital projects, rather than to fund day-to-day spending, as she laid out in her Mais Lecture in March. That approach, the chancellor argues, will mark a break from a “short-termist approach that disregards the importance of public investment”.

The chancellor is expected to raise taxes, cut spending and get tough on benefits in October’s budget, having warned of a £22bn ‘black hole” of overspend by Whitehall departments.

But…O’Donnell, O’Neill, Mazzucato, El-Erian, Muscatelli, Wren-Lewis, Portes, and Newman warn that cuts to investment must be avoided.

They write:

In the upcoming Budget it is essential that the government recognises the important role that public investment must play in the decade of national renewal.

Further cuts to public investment must be avoided, a strategy for substantially increasing public investment adopted, and a process initiated to implement a pro-investment fiscal framework that focuses on long-term fiscal sustainability.

The agenda

• 7am BST: Germany’s wholesale price index data for August

• 10am BST: Eurozone trade data for July 10am

• 1.30pm BST: Empire State survey of US manufacturing