Boosting economic productivity through the application of supply-side methods
The Office for Budget Responsibility (OBR) has underscored the critical role of public investment, particularly in infrastructure, for promoting long-term economic growth and productivity in the UK.
Recent reports, including the OBR's "The evolution of potential output" and former European Central Bank President Mario Draghi's "The future of European competitiveness: a competitiveness strategy for Europe," have emphasised the importance of public investment in driving economic growth.
Public investment supports productivity growth by enhancing physical capital, such as transport infrastructure, housing, and research and development (R&D). These investments are crucial for sustaining growth clusters and agglomeration effects that boost productivity regionally and nationally.
Infrastructure investment complements other growth policies, like housing and skills development. For instance, increasing affordable housing in fast-growing industrial clusters supports labor mobility and sector expansion, which boosts productivity without merely displacing workers.
The OBR has highlighted the need to balance fiscal discipline with strategic investment. While recent fiscal rules prioritise debt reduction by 2030, overly stringent spending cuts may risk stifling private sector growth and market confidence. Sustained, targeted public investment in infrastructure is seen as essential to counter the UK's "fragile productivity" performance and to support innovation-led growth.
Increases in government R&D funding, integral to the Industrial Strategy, are intended to raise the UK’s innovation capacity, which feeds into productivity improvements and high-quality job creation. Allocations include £86 billion over several years, boosting advanced manufacturing and other key sectors.
However, the OBR warns that public sector net investment must be maintained or increased carefully to avoid undermining infrastructure and growth potential. Central government net investment in the 12 months to July 2025 was £31.3 billion but had declined compared to the previous year, hinting at possible constraints on future infrastructure development.
In summary, the OBR report and related government analysis emphasise that targeted public investment in infrastructure, housing, and R&D is vital for improving long-term productivity and economic growth in the UK. This must be balanced with fiscal responsibility to avoid crowding out private investment or causing economic uncertainty. Strategic focus on areas with growth potential and integration with local growth policies, including transport and housing affordability, are recommended to maximise the productivity impact of public spending.
- In the UK, the Office for Budget Responsibility (OBR) suggests that strategic investment in infrastructure, housing, and research and development (R&D) is crucial for boosting productivity and economic growth, while maintaining fiscal discipline.
- As highlighted by the OBR, public investment in infrastructure plays a significant role in supporting innovation-led growth, countering the country's "fragile productivity" performance, and integrating with local growth policies such as transport and housing affordability.
- To stimulate long-term economic growth and productivity, businesses and the finance industry find opportunities in this emphasis on public investment in strategic sectors like advanced manufacturing, as exemplified by the UK's increased R&D funding allocations.
