Chancellor’s move to cut infrastructure projects threatens growth, economists warn

Rachel Reeves’ decision to make immediate cuts to capital spending has shaken a number of top economists, who have said they are deeply concerned about the potential knock-on impacts on the UK’s economic growth.

In order to plug a £22bn hole in the government finances, the Chancellor announced £5.5bn worth of spending cuts yesterday, including cuts to major pieces of infrastructure.

Reeves scrapped the £1.7bn tunnel under Stonehenge and the A27 Arundel bypass. She also paused Boris Johnson’s £500m Restoring Your Railway Fund, which sought to restore railway lines which had been shut down as part of the Beeching cuts in the 1960s.

Business groups were disappointed by the Chancellor’s decisions, warning that it could have a detrimental impact on Reeves’ plans to generate economic growth.

Anna Leach, chief economist at the Institute of Directors (IoD), said it was “clearly disappointing” to see the cancellation of some significant infrastructure projects.

“Our own research shows that investment in the road network should be the main infrastructure priority for government,” she said.

Rain Newton-Smith, chief executive at the Confederation of British Industry (CBI), said that delivering on the government’s growth “mission” would require a “continued focus” on infrastructure investment to help crowd-in the private sector and lift productivity.

“Given the catalytic impact on business investment and confidence, the government cannot afford to take a short-term view on vital infrastructure projects,” Newton-Smith said.

The UK has consistently lagged peers on public investment, which many economists think is the main factor contributing to the economy’s weak performance since the financial crisis.

If the UK had matched the OECD average over the past two decades then public investment would be £500bn higher, according to the Resolution Foundation.

While the new government has made a commitment to make the UK the fastest growing economy in the G7, economists argued that Reeves’ decision to trim infrastructure spending won’t help achieve this goal.

“If you want the highest growth in the G7 – which would improve the public finances – you can’t also have the lowest investment in the G7 as we do at present,” George Dibb, associate director of economic policy at the Institute for Public Policy Research (IPPR) said.

James Smith, research director at the Resolution Foundation, argued that if Reeves took the same approach to capital spending at the budget, then “it wouldn’t be good for growth”.

Similarly, Sam Richards, chief executive of Britain Remade, said capital spending cuts were not “risk free”.

“There are some projects in the Restoring our Railways fund – like the Tavistock railway line – that are vital to delivering prosperity in parts of the country that don’t get the same focus as London and the South East,” he said.