The chancellor is stuck in the same bind as her Tory predecessors – by choice

Diane Abbott has been the Labour MP for Hackney North and Stoke Newington since 1987

It would be completely unfair to blame all the problems of the British economy on the chancellor, Rachel Reeves. But it is reasonable to question whether her policies will lead to any significant improvement in those problems. The answer is a resounding no.

The spring forecast provided nothing in terms of government initiative to improve the economy. Having been badly burned by implementing austerity in all her previous fiscal events, some of it drafted by the Tories but not implemented by them, the chancellor clearly decided discretion was the better form of valour.

Given the poor forecasting record of the Office for Budget Responsibility (which relies on the UK Treasury model of the economy), another chancellor might not have relied so much on its projections of marginally better times ahead in future years. But people clutch at straws, when there is nothing else to cling to.

Insisting that the economic plan is working while relying on forecasts of marginal increases in GDP per head, as the chancellor did, suggests at least a lack of presentational skills, if not being completely out of touch. There is no need to tell voters they will be better off if it really is going to happen. They will feel it in their real pay, in improving public services and in a lower cost of living. But the Treasury is littered with the nameplates of Tory chancellors of recent years who promised improvement and failed to deliver it.

The chancellor seems as flummoxed as her Tory predecessors when the private sector fails to deliver growth. Promising them deregulation to lift their “animal spirits” is precisely a reiteration of failed Thatcherite nostrums of the past that Reeves bemoans.

The clear path out of the crisis should be a significant increase in public sector investment, which could address the serious failings: a housing shortage, woefully inadequate infrastructure, communications and transport. Public investment would kickstart the recovery, address significant problems and be easily affordable at current real interest rates.

Instead, the chancellor and prime minister seem in thrall to the private sector, which continues to underinvest. Their only exception to this is increasing military spending, which Reeves boasts is the biggest rise since the cold war ended.

Some of us remember when there was a peace dividend then. There cannot be a war dividend now. In fact, military spending is one of the most wasteful areas of all. But in uncertain times, the chancellor’s choice appears to be: let us add to uncertainty.

To avoid price shocks like we saw this week, we need a green industrial policy

Mariana Mazzucato is professor in the economics of innovation and public value at University College London. Her forthcoming book, The Common Good Economy: a new compass, will be published in June

Rachel Reeves is right to aim for calm this week, but a stability-enhancing spring forecast doesn’t need to be boring. Economic strategy should be bold, inspirational, and catalyse structural change. In an unpredictable world, resilience is about much more than headline macroeconomic figures or forecasts.

The OBR forecast inflation falling to 2.3% this year – down from 3.4% in 2025 – and reaching its 2% target by late 2026. But these forecasts do not account for this week’s oil and gas price shocks, which risk delaying any progress being felt in people’s pockets. Those spikes show how vital clean energy is for long-term security and economic resilience. Food and energy price inflation explained about half of the 9% increase in consumer prices in 2022. That trend could continue as geopolitical threats and the effects of climate crisis intensify.

We also need bolder action to escape the British cycle of underinvestment. Business investment has ranked lowest in the G7 for 24 of the past 30 years and 28th out of 31 OECD countries. Meanwhile, public investment has averaged just 2.6% of GDP over the past 25 years, compared with the G7 average of 3.5%. Discredited austerity orthodoxy and obsessions with narrowly defined fiscal rules have only weakened Britain’s position.

The key to getting Britain investing again is through an active, entrepreneurial state that sets clearly defined missions, confidently shaping its relationship with the private sector and investing to expand productive capacity. That requires a shift in the way that we conceptualise and measure public value. The Treasury’s shift towards public sector net financial liabilities (PSNFL) in January last year is a positive step – allowing the government to measure not only what it owes but what it owns. However, these metrics still create a short-term bias, with investments valued on a five-year horizon. Public sector net wealth (PSNW) would be a more robust metric than PSNFL, factoring in long-run returns on public investment.

The government should also unleash the full potential of its institutions, like public banks, to deliver economic transformation. The National Wealth Fund (NWF) has been instructed to support clean energy, accelerate regional investment and strengthen sovereign capabilities. But its £28bn capitalisation pales in comparisonwith Germany’s €500bn (£435bn) infrastructure fund. And it is hamstrung by private banking logic that insists the fund should expect to make a profit on every deal.

Today, Rachel Reeves called for “an active and strategic state, building growth and economic security in an uncertain world”. I agree – and that is precisely why the investment institutions and tools capable of delivering it must now match that ambition. A true green industrial state could provide economic protection from geopolitical conflicts and break us out of Britain’s underinvestment cycle.

© The Guardian