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Productivity Commission’s evidence session highlights urgent need for public investment

There is a pressing need for increased public investment in various sectors to boost productivity, address regional inequalities, and facilitate the transition to a green economy, witnesses told a recent evidence session conducted by the UK Productivity Commission. The session focused on four key areas: sizing public investment, investment in priority regions and sectors, public infrastructure investment, and strategies for improving public investment.

The witnesses for this session were:

  • Nigel Driffield – Professor of International Business, Warwick Business School
  • Gerald Holtham – Professor of Regional Economy, Cardiff Metropolitan University
  • Jan in’t Veld – Head of Sector for Model-based Economic Analysis, European Commission
  • Urvashi Parashar Chief Impact Officer and Chief Economist, UK National Infrastructure Bank

Sizing public investment

The evidence session underscored the need for urgent public investment in several critical areas, including research and development (R&D), skills development, housing (particularly heat pumps), and technology (such as batteries for electric vehicles). The primary priorities identified were energy security and the green transition. Synergies between publicly provided R&D and private human capital, particularly in upskilling for the green transition, were also highlighted as crucial for success. The witnesses argued that the UK should aim for a minimum increase of 2-3 percent of GDP per year in public investment, while also implementing tax incentives to unlock business investment.

Public investment in priority regions and sectors

The session emphasised the importance of targeted and substantial public investment in regions and sectors currently trapped in low-skilled, low-productivity equilibriums. To reduce regional and sectoral inequalities, consistent policies should be implemented, the experts said. The retreat of venture capital from certain regions and sectors was noted as a concern, and it was suggested that public policies should aim to reverse this trend. Successful policies should also focus on interconnectivity between energy systems and promote labour mobility through measures like wage subsidies or tax credits for research and development.

Public infrastructure investment

While acknowledging that infrastructure investment is not a silver bullet, those giving evidence stressed its crucial role in achieving Net Zero emissions and reducing regional inequalities. They highlighted that public investment in infrastructure should strike a balance between financial returns and demonstrating additionality and the ability to attract private investment. The UK Infrastructure Bank (UKIB) plays a significant role in commercialising business models, accelerating innovation in technology and infrastructure, and facilitating new investors to enter markets, which helps to fill gaps in the investment landscape and help the private sector to take risks.

Improving public investment

To address the UK’s productivity and competitiveness challenges, the experts stressed the importance of increased public investment and improved policy coordination. They advocated for a coordinated policy framework similar to countries like South Korea, which successfully transitioned to a new economic model. Aligning macro and micro-level decisions, leveraging regional skillsets, and tailoring support to specific regions and sectors were identified as key strategies. It was also emphasised that public expenditure must be significantly increased to meet current spending requirements and that public agency borrowing should not count towards public sector borrowing.

This evidence session conducted by the UK Productivity Commission shed light on the urgent need for increased public investment in key sectors and regions, and highlighted the importance of targeted investment, policy coordination, and the role of infrastructure in driving economic growth, reducing regional inequalities, and facilitating the green transition. It is expected that these insights will inform future policymaking and steer the UK towards a more productive and sustainable economy.

Watch the session