Living standards vs. economic growth – The Chancellor’s long-term capital investment dilemma

“The wisest thing you can do is give everyone a good home” 

These were the thoughts of Greater Manchester Mayor Andy Burnham, speaking at a Resolution Foundation event on capital investment earlier this week. But, with the June Spending Review looming, the Government will be focusing on more than just housing and will have to make tough choices about where long-term capital investment is best allocated. 

The Government can take credit for prioritising capital investment, which focuses on the creation of long-term assets as opposed to day-to-day spending. The 2024 Autumn Budget saw the Chancellor commit over £100bn of capital funding over the course of this parliament.  

As Rachel Reeves looks to set multi-year funding allocations under the Spending Review, she will have to make a tough decision over whether to prioritise economic infrastructure – such as roads and utilities – or social infrastructure like housing and hospitals. The Chancellor is unlikely to have the financial headroom to fully prioritise both. 

In part, this decision comes down to what the Government values most. On the one hand, investment in areas like hospitals and schools are much needed and may have a positive effect on living standards. On the other hand, investment in areas like transport, technology and data, are seen by many as high-growth areas. There is a trade off with both options.  

So, where should the Government put their cash?  

The Government will have one eye on the polls and therefore may be minded to divert capital investment into vote winning policy areas. This would mean pumping money into schools and the NHS, both of which are crying out for long-term investment and regularly feature at the top of voters’ concerns.  

The Government may also consider additional support for transport and R&D. Commitments in these policy areas may have more of an impact on economic growth rather than on working people. However, turbulent global economic conditions, caused in no small part by the US administration, are unsurprisingly influencing what the Government wants to prioritise. Rachel Reeves could be tempted to boost funding here in pursuit of all-important growth. 

Alternatively, the Chancellor could consider the thoughts of Andy Burnham and assess whether a capital funding boost to housing could be the wisest approach. 

Housing policy has been tumultuous over the last decade and a half, with 16 different housing ministers over the Conservatives’ 14 years in power. Under this changing leadership, the rate of housebuilding has stalled and has consequently led to a mass shortage in social housing; over 1.3 million are on social housing waiting lists across England.  

Aside from the obvious direct impacts to living standards, capital investment in social housing could also reduce the significant financial outlay that councils spend on stopgap solutions to this issue; last year local authorities spent over £2 billion on temporary accommodation.  

Almost a year after the General Election, the Spending Review represents one of the most critical junctures of this Labour Government and could determine their chances of being re-elected. The Chancellor will need to work out which areas need capital investment the most, and at the same time try to shape a narrative that supports economic growth and improve living standards.  

With this in mind, maybe long-term investment in housing represents the perfect balance to transform the Government’s fortunes? Time will tell.   

Our recent guide to engaging with the Spending Review, drawing on the expertise of former Treasury Special Adviser Jennifer Gerber and former Whitehall Permanent Secretary Sir Philip Rutnam, can be downloaded here.