A Budget for Public-Private Dealmaking?
“…the only way to drive economic growth … is to invest, invest, invest. There are no shortcuts.”
The Budget is now a week old and has been very well-analysed. Since then we have seen a lot of discussion of the aggregate tax take, and of individual tax measures – and in particular national insurance and inheritance tax. Less well travelled is some joined up thinking about some of the areas where the Budget necessitates private investment and wider partnership with the private sector to deliver the growth that Reeves targets.
This looks at the some of the key areas where the Budget and Spending Review have clearly opened up this space, and which are therefore likely to be a particular focus for the Government as it moves into the three year Spending Review process.
The macroeconomic and fiscal context
This was a major fiscal event - increasing current and capital spending by almost £70 billion annually from next year, around half of which was funded by tax increases. This was facilitated by new fiscal rules: a “Stability Rule”, that echoes the Brown government’s “Golden Rule”, to fund day-to-day spending from receipts; and a redefined debt target, using public sector net financial liabilities (PSNFL) in place of public sector net debt (PSND). The latter created over £23 billion of additional space for capital spending due to different accounting treatment of Bank of England flows and netting off illiquid public sector financial assets - in particular, student loans.
There are three key consequences of the new rules for investment. First, the additional headroom has enabled larger capital settlements for departments in 2025-26 and higher capital spending assumptions for the next spending review period. The OBR expects departmental capital spending to be £22 billion higher in 2029-30 compared to the March Budget. Public sector net investment averages 2.6% of GDP over the forecast period, 0.4% higher than the average since 2004-05. But is this enough to fix the crumbling health, education, and justice estates, without further private investment?
Second, the redefined debt measure creates an incentive to invest in illiquid financial assets. The government can, in effect, deliver policy through loans and equity injections with minimal impact on the new debt rule. This looks likely to be used by the National Wealth Fund and GB Energy to crowd in private sector investment, particularly renewable energy technologies that are unproven in the market at scale, such as carbon capture utilisation and storage (CCUS) and green hydrogen.
Third, the move to five-year capital spending settlements will bring much-needed certainty to departments and enable better long-term planning for capital projects. However, as we noted previously, there’s nothing in the fiscal rules to prevent departments from raiding capital budgets to meet in-year current spending pressures – a practice that has consistently undermined public sector investment in the past. This puts greater pressure on the public spending framework and HM Treasury to protect capital spending and not take the easy way out when the pressure is on – as, notes the Health Service Journal, the NHS is doing yet again this year, raiding capital budgets to the tune of £900m.
Where does this leave the private sector?
The Budget documentation identified several sectors, geographies and, indeed, specific projects where the Government is trying to build space for private investment.
The Government framed its policy priorities for the Budget through seven ‘pillars’, including: investment, infrastructure and planning; regional growth; industrial strategy (for which, we can read a focus on sectors and geographies with a sectoral emphasis); innovation; and net zero.
Net Zero
The Government is heavily investing in decarbonising the grid. Some of this is through familiar, well understood, technology. Offshore wind, for example, is long established in the UK and benefits from a well-understood financial model and a ready market of suppliers. New installations can and will be supported through the CfD auctions mechanism.
However, some of the planned interventions are through genuinely new, innovative, projects and technologies. For example, with both CCUS and hydrogen, the Government is essentially having to create a market. Notably, parts of Miliband’s Department for Energy Security and Net Zero Spending Review settlement for 25/26 onwards are pre-agreed. Clearly, the aim here is to create certainty which will help build a pipeline of investors.
‘Innovation clusters’
The Industrial strategy and the wider devolution and regional growth agenda significantly align around the concept of ‘innovation clusters’ – regional sector specialisms defined as “strong sectoral clusters characterised by concentrations of employment, output, high productivity, and innovation” which “vary in geographical shape and often span large areas, cutting across local government boundaries and nations of the UK”. The Budget and Spending Review targeted funding at some key geographies and sectors to that end.
The Industrial Strategy is therefore significantly focused on identifying the geographies where the 8 key IS sectors[1] are particularly strong and, as ‘innovation clusters’, worth investing in. The Budget followed through – with, for example, Cambridge name-checked and funded as a key cluster for life sciences.
Related to this, certain sectors (again, especially the 8 key IS sectors) are being actively sponsored as sectors instead of geographies. On life sciences this can be seen in the Innovative Manufacturing Fund – which is part of a £520m wider pot. Not all of this is new money; however, it's also not going to be sufficient for life sciences alone given the scale of the Government’s ambitions. The absolute goal is that the public funding will crowd in private funding, building new, negotiated, public-private partnerships to help development and innovation in the Government’s key strategic sectors.
Regional devolution
The Industrial Strategy has extended funding to individual geographies based significantly upon their affinities with one or more of the Government’s key sectors. Separately, the Department for Housing, Communities and Local Government and the Department for Transport SR settlements offered some discrete pots of capital money for identified regional spending priorities. Examples include funding for housing and associated infrastructure in Liverpool Central Docks; new or upgraded transport networks (for example, the Transpennine upgrade) or decarbonisation of transport networks (through the City Region Sustainable settlements).
However, despite the near-unprecedented largesse, again, arguably the ambition is still outstripping the available funding. New regional combined authorities are being founded in places such as the East Midlands or the North East with very little in the way of upfront funding but significant needs if they are to meet their ambitions (which are tending to focus particularly on transport, housing and green energy).
This creates a need for more public capital funding, in particular. However, this public capital necessarily will need to be complemented with private investment. This inevitably will result from significant negotiated public-private deals with investors fronting the cost of infrastructure in, particularly, the areas covered by these Combined Authorities.
[1] Advanced Manufacturing; Clean Energy Industries; Creative Industries; Defence; Digital and Technology; Financial Services; Life Sciences; Professional and Business Services.