UK could expand infrastructure investment within fiscal rules, Resolution Foundation says

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UK infrastructure investment fiscal rules

Highlights

Resolution Foundation research highlights that 2024 changes to debt measurement under Rachel Reeves allow UK public financial institutions greater latitude for infrastructure investment.
Matching the European Investment Bank's pre-Brexit UK investment rate of 0.27 percent of GDP would boost National Wealth Fund investment by £15.6bn over five years and raise annual debt interest costs by £400mn after three years.
Treasury has doubled public financial institutions' capacity to £199bn and imposed borrowing limits to maintain fiscal discipline amid challenging public finances and heightened market sensitivity.

Debt rule changes open funding capacity

The Financial Times reports that forthcoming Resolution Foundation research says Andy Burnham can be more aggressive in using public financial institutions to support infrastructure investment. The think-tank says a 2024 change to the definition of public debt under chancellor Rachel Reeves creates extra latitude that could help replace support lost after Britain's exit from the Luxembourg-based European Investment Bank following Brexit.

Burnham, who is due to take over as prime minister on Monday, has said he will keep the existing fiscal rules even as he promises better infrastructure across the UK. Ruth Curtice, the think-tank's chief executive, says the scope for additional investment looks straightforward, while adviser Lord Jim O'Neill argues higher public investment can be delivered without unsettling government debt markets if projects generate strong returns.

The report focuses on public financial institutions, including the National Wealth Fund, British Business Bank, UK Export Finance and the National Housing Bank. Under the public sector net financial liabilities measure introduced into the second fiscal rule in 2024, some financial assets such as loans and equity stakes are offset against debt, making it easier for these bodies to lend or invest without pushing the government outside its target.

The Resolution Foundation says the first step should be to expand the National Wealth Fund's capacity in areas such as power transmission, ports, reservoirs and battery technology. Matching the 0.27 per cent of GDP that the European Investment Bank invested in Britain before 2016 would lift the fund's investment by a cumulative £15.6bn in real terms over half a decade, although the extra borrowing would still raise annual debt interest costs by about £400mn after three years.

Market caution shapes policy debate

Any move to use that flexibility more fully comes as the incoming government inherits strained public finances and heightened market sensitivity to looser policy signals. The IMF last week warned Burnham against increasing public spending, and the Office for Budget Responsibility says this month that the UK's public finances are in a challenging position relative to history and to peer economies after a sharp rise in debt as a share of GDP over the past two decades.

The Treasury has already imposed its own limits on how much extra borrowing it is willing to accumulate through these institutions, in part to reassure investors that fiscal discipline remains intact. Even so, the think-tank says the current framework leaves further capacity that can be used without violating the rules, because returns from acquired assets are not captured by a simple reading of the additional interest bill.

In a statement, the National Wealth Fund says it has already committed more than £10bn and mobilised a further £19bn into capital-intensive infrastructure, supply chains and businesses across the UK. A Treasury spokesperson says the government has more than doubled the firepower of the UK's public financial institutions to £199bn, while Curtice says other bodies such as the National Housing Bank could also be expanded, although operational constraints limit how quickly that can happen.

Our earlier coverage of UK lenders positioning for Andy Burnham’s devolution agenda described how major banks such as Lloyds and NatWest were seeking a larger role in financing regional infrastructure projects ahead of his taking office. We noted that while greater local control could accelerate project approvals and expand private funding options, constraints like local planning capacity, high borrowing costs and concerns about potential sector tax changes could influence how quickly deals progress.

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