Labour and the Conservatives have triggered a public spending bidding war, promising massive programmes of borrowing that will return public investment to levels last seen in the 1970s, according to Britain’s leading experts on the public finances.
The Institute for Fiscal Studies said plans unveiled by Sajid Javid, the chancellor, and John McDonnell, his Labour shadow, would represent a decisive break with the past but warned that a future government may have trouble delivering projects on the scale envisaged.
On a day dominated by the ditching of austerity by both main parties, Javid’s plan to spend an extra £20bn a year on capital projects such as roads, railways, schools and hospitals was trumped by McDonnell’s proposal to increase infrastructure investment by £55bn for the next five years.
The IFS said the shadow chancellor’s plans were the most ambitious. His party would more than double net capital spending to £100bn a year, catapulting the UK from near the bottom of the international public infrastructure league table to near the top. Under Labour, capital spending would be close to 5% of GDP – a level last seen at the time of the IMF-imposed cuts in 1976.
McDonnell used a speech in Liverpool on Thursday to outline the economic priorities of the party, and said a Labour government would change the fiscal rules so borrowing for investment would be excluded from borrowing targets.
The shadow chancellor said his programme was “in the best tradition of British socialism” and followed in the footsteps of Hugh Dalton and Gordon Brown. He also promised to shift significant political decision-making power from London to the north.
Asked afterwards whether the amount pledged could spook money markets and lead to interest rate rises, McDonnell said: “Our scale of investment matches the scale of those emergencies that we now face, on climate change and socially. I’ll tell you, if we didn’t set off on that march, future generations would never forgive us.”
Javid condemned Labour’s plans as “fantasy economics” while unveiling his own plan that would rip up the fiscal rules imposed by his Tory predecessors in the Treasury.
Speaking at an aircraft hangar outside Manchester, the chancellor loosened constraints on borrowing to the tune of £20bn a year at the same time as attacking Labour for planning to “saddle the country with debt”.
He drew a line under the era of George Osborne and Philip Hammond by setting a new cap on borrowing for investment at 3% of national income, while day-to-day current spending would be balanced.
If the Conservatives win the election, that would allow borrowing to rise from £47bn in the current financial year to around £70bn, and then keep rising as the economy expanded in the future.
Apart from a brief period during the financial crisis and deep recession of 2008-09, investment spending has not been at 3% of GDP since Margaret Thatcher became prime minister in 1979.
Repeatedly challenged over his decision to increase borrowing at the same time as criticising Labour for wanting to do the same, Javid said now was a responsible time because interest rates were negative for the government and it was a moment for “new rules for a new economic era”.
Ben Zaranko, a research economist at IFS, said: “Both parties’ plans would represent a sharp change in policy, and Labour’s plans are especially ambitious. The key challenge for a government seeking to deliver investment on this scale – particularly in a short timeframe – will be finding worthwhile and viable projects in which to invest.
“Shortages in the number of suitably skilled construction workers, a dearth of ‘shovel-ready’ projects, and practical issues relating to delivery will be challenges the next government will need to think carefully about how to overcome.”
James Smith, the research director of the Resolution Foundation thinktank, said: “The economic plans set out by Labour and the Conservative parties today represent a dramatic shift from the narrow debt-driven debate that has dominated the past decade.”
He added: “With the low cost of borrowing, austerity Britain is going to turn into hard-hat Britain whoever wins the next election. This shifts the focus to ensuring that investment delivers real returns not just higher debt.
“There remain big differences between the main parties’ economic plans, which will be fought over in the election. But the even bigger difference, following today’s speeches, is between the UK’s recent economic past and its plans for the future, as both parties have signalled a major shift towards a far bigger, investment-focused state.”
Public spending on investment projects was cut sharply by Osborne after his arrival at the Treasury in 2010 as part of the coalition government’s attempt to reduce the UK’s budget deficit. It has averaged around 2% of GDP since.
The spending announcements by Javid and McDonnell came as the UK’s top civil servant blocked publication of a report by the Treasury’s economic forecaster that was expected to show the public finances have deteriorated over the last eight months and that the chancellor was in breach of his old fiscal rules.
Business groups, such as the British Chambers of Commerce, welcomed the promise of more infrastructure spending but struck a note of caution about the scale of Labour’s plans.
“Our business communities will agree with John McDonnell on three fronts: the UK needs more public investment in infrastructure, more focus on upgrades in the regions, and more decisions taken locally, rather than in Westminster,” said Adam Marshall, its director. “We may agree on the aim – but businesses will raise real questions about how Mr McDonnell plans to get there.”
Unison, the trade union, said Javid’s pledges of cash did not go far enough. Dave Prentis, the general secretary said: “After nine long years of spending cuts, this is nowhere near enough to repair the damage done to budgets, services and staff in hospitals, schools, police stations and town halls across the country.”
Ed Davey, the Liberal Democrat Treasury spokesman, said both the Tories and Labour were “writing promises on cheques that will bounce”.