Chancellor Rachel Reeves prepares to ramp up investment spending in her budget

The chancellor has given another clear signal.

The economic strategy she will pursue in her Budget later this month will be more radical than the one set out in Labour’s election manifesto.

Rachel Reeves said this morning that the government will spend £22 billion over the next 25 years, funding two Carbon Capture and Storage (CCS) projects in the North of England.

It's a glimpse of what’s to come.

The two schemes, on Merseyside and Teesside, will create 4,000 new jobs and are a joint venture with BP, Equinor and ENI.

The three together will provide £8 billion over the next few years.

“The last government spoke about ‘Levelling-up’ but never did it,” Reeves said.

“This is about genuinely getting good jobs, paying decent wages, putting money into the pockets of people in areas that have been left behind for too long.”

This is an example of taxpayer money supporting private sector investment that might not have happened otherwise, a trend the chancellor says will increase as she seeks to deliver on a pledge to kickstart economic growth.

Public investment, spending by the state on the creation of fixed, long-term assets, like roads, railways, buildings and CCS plants - plays a role in shaping wider economic growth and can support the delivery of public services.

This year, Public Sector Net Investment (PSNI) will amount to 2.4% of national income (GDP) - a relatively high level by recent standards.

Back in March, the Conservative government’s spending plans envisaged PSNI falling to 1.6% of GDP by 2028/29.

Before the election, Labour promised additional spending on investment in its manifesto but PSNI is still scheduled to fall to around 1.7% of GDP by the end of this parliament.

To avoid making real-term cuts to public investment, the chancellor would need to top-up spending by around £18 billion a year by 2028/29.

Rachel Reeves is strongly hinting this is something she is considering.

“[The previous government] were cutting back on investment at exactly the time when we need to be increasing investment in our economy in order to improve productivity,” she told reporters.

“Investment was not prioritised by the last government. I’m not going to make those mistakes”.

Rachel Reeves's speech at Labour’s party conference last week contained a similar war cry.

It would be very strange to make such a big deal of publicly talking up the importance of public investment, and then not do something about it in her Budget.

The promise she made before the election makes it very difficult for her to raise significant sums of money for investment through higher taxation.

The only conceivable way to raise investment would be by borrowing more than Labour has previously said it would.

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Here’s the rub:

The latest analysis by the Office for Budget Responsibility (OBR) suggests that although higher public investment can pay for itself, it usually only does so in the long term and it’s unlikely to boost economic growth significantly for several years.

The risks are more immediate.

The risk is that higher borrowing, at a time when both the national debt is already high and the UK is near full employment, could put upward pressure on interest rates and inflation.

The UK’s track record of delivery on investment is also a cause for concern.

HS2 was the most recent mega-project to end up running years late and hopelessly over budget.

There are plenty of respected economists who are urging the government to ramp up public investment and there are good reasons to do so, but money will need to be spent carefully.

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