UK faces huge funding gap to tackle crumbling infrastructure

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The UK will need to mobilize £1.6 trillion in funding by 2040 to meet the country's public infrastructure needs, according to new research highlighting the massive investment needs facing Keir Starmers' government.

The research from consultancy EY comes as Prime Minister Rachel Reeves considers easing fiscal rules to allow the Labor government to increase borrowing to pay for higher levels of public investment.

On Friday, Sir Gus O'Donnell, a former top British civil servant, added to growing calls for the prime minister to ditch exorbitant debt rules as part of fiscal reforms to boost capital spending.

The prospect of a rise in lending has investors nervous this week as they await a clear signal from Labor that it intends to pump more public money into the country's ailing infrastructure.

Reeves hinted at Labor's annual conference on Monday that a review of Britain's fiscal system was underway, saying he would stop the low investment that is causing decline.

Prime Minister Starmer later declared when he visited New York this week for the United Nations General Assembly that he had always thought we had to borrow to invest. He added that the government would be a catalyst for private spending.

The EY report, led by former financial adviser Mats Persson, estimates that spending needed between now and 2040 will reach $1.6 trillion in areas including energy, transport and defence.

Persson, now an EY partner, said much more private sector involvement would be needed, along with public spending, if the demands were to be met.

Persson said there was an absolute need and significant potential for more private investment in UK infrastructure assets and capital programs, which have traditionally been funded by taxpayers.

The consulting firm derived its estimates from the construction pipeline of the government's National Infrastructure and Planned Infrastructure programs, as well as departmental capital projects for which funds had not been allocated.

The list of unfunded projects includes the railway network, future phases of the Tempest air defense program, energy projects, hospitals and schools. These figures exclude projects already underway, such as the HS2 high-speed rail line, and projects that NIC says are being funded by the private sector.

The Tempest phase of the air defense program is one of the unfunded projects. British Prime Ministers Office/AFP/Getty Images

Under the existing fiscal scenario, only 900 billion of the programs are expected to be covered by public spending, leaving a $700 billion shortfall, EY said.

EY warned that given the UK's poor record in delivering infrastructure projects on budget, the actual bill could be a trillion times higher.

The UK has ranked last in the G7 total investment rankings for the past 30 years and has suffered damage to the quality of its infrastructure, including roads and hospitals.

Reeves is also facing extreme pressure to find additional funding for routine spending on public services, from education to courts, and made painful decisions in the Oct. 30 budget.

Treasury officials are working on an overhaul of Britain's fiscal rules as they try to balance demands for spending on public services and infrastructure with warnings from Britain's fiscal watchdog that Britain's debt levels are on an unsustainable upward trend.

In a column in the Financial Times, former cabinet minister ODonnell argued that the Treasury should incorporate a measure of public debt that better reflects assets and liabilities, which would enable more capital spending.

He also criticized Britain's fiscal rules adopted by Reeves under the previous Conservative government, which required public debt to be reduced every year within five years.

We need to ditch the last government's outrageous debt rules, which said debt should fall in four or five years but said nothing about the other years, he said.

He argued that the government must take steps to reassure investors that Britain's public finances are on a sustainable path to allow space for higher and better value investments while maintaining market credibility.

ODonnell said the government should try to balance taxes and day-to-day spending in three years rather than five and require the independent Office for Budget Responsibility to provide an independent assessment of debt sustainability.

Reeves was determined to stick to Labor's manifesto on fiscal rules that debt should fall as a share of GDP in the fifth year of the forecast, colleagues said. Instead, they said, her focus is on how to measure debt.

A Treasury spokesman said Reeves' October 30 budget, the first by a Labor government since 2010, would build on economic stability, including strong fiscal rules set out in the manifesto.

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