The first step to our economic liberation is to tear up these crippling fiscal rules

Illustration by Dominic McKenzie. Illustration: Dominic McKenzie/The Observer

The heart of Britain’s problem is that we don’t invest enough in ourselves – a pattern that has grown most acute over the last 14 years of misgovernance, but reaching back for decades. It shows up in everything from having the lowest number of MRI scanners per million people compared with our peers, to the paucity of new great companies coming forward on our stock market, and above all in stagnating productivity and real wages.

The recession we are living through and the prolonged decline in living standards could be better faced if there were a prospect of a robust reversal in the years beyond. As matters stand, there is not.

The scale of the necessary turnaround is breathtaking. Just to lift investment to the average of our major competitors would imply a rise of some £100bn a year and then maintained for many years. It is a trillion-pound, 10-year challenge with more to follow – an across-the-board collective mobilisation of resources analogous to what Japan, South Korea and other Asian tigers achieved in their periods of powerful growth and development. The results would be transformative: closing regional inequalities, turbocharging our great cities, creating industries, addressing vital environmental demands and opening up opportunities for millions of our citizens.

Yet the national conversation neither diagnoses the scale of the need nor touches on the mechanisms. It is dominated by the rightwing, shrink-the-state-to-cut-taxes world view that has conferred the great four economic disasters since 1979 – Margaret Thatcher’s monetarism, her Big Bang financial deregulation, George Osborne’s austerity and then Brexit (which alone has reduced our GDP by 5%, according to a recent report by the investment bank Goldman Sachs) – that cumulatively have laid a great country so low. Now the right – whether the Tories’ five rightwing “families” or the laughable economic programme of the self-declared “real conservatives” of Reform UK – wants to embark on a fifth disaster. To double down on shrinking the state to cut taxes, to which chancellor Jeremy Hunt will genuflect in next month’s budget.

The electorate, at least for the moment, is not to be duped. Only one in six Britons favour tax cuts that lead to less spending on public services, warns a forthcoming report from the Fairness Foundation. Nor does any economist who has studied the evidence endorse the rightwing mantra that tax cuts are the indispensable source of growth, as the IMF acknowledges, instead they presage greater inequality, diminished public services and weakened defence and security. Tax cuts in 2024 to engender acute privation in 2025 and 2026 may appease the right, but not the emergent electoral majority. The self-evident futility of tax cuts may even achieve the impossible: their unpopularity.

The driver for growth, as it was in Asia, must instead come from public investment rising by at least half, to more than 3% of GDP – an increase of £25bn a year – designed to spark a much greater rise in business and inward investment alongside a jump in research and development spending. The former Tory MP Chris Skidmore’s admirable report on “Mission Zero” identifies some vital projects, the National Infrastructure Commission others, and the impressive if now forgotten levelling-up white paper still more. To ensure the private sector follows through at the necessary scale will require, in turn, a wholesale repurposing of the savings and investment system. It will require a repurposing of our savings, pension, banking and investment systems supported by a strategic approach to opening up overseas markets both to goods and especially service sector exports. Together it would represent a profound reshaping of British capitalism.

Is this possible? What about the disciplines of “fiscal rules”? The unattractiveness of the UK as an investment destination post-Brexit? The alleged depressive effect of present levels of taxation? First, the purpose of fiscal rules is to provide a credible framework for public action, not to freeze government into immobility. It is important that day-to-day current public spending should be balanced by day-to-day current tax receipts over the economic cycle, and sustained borrowing should only be permissible for capital investment. Growth in public debt is only a problem, as the Liz Truss/Kwasi Kwarteng experiment dramatised, when it is accompanied by a decline of public assets so that the public sector’s net worth shrivels. With a reframing of fiscal rules to acknowledge this truth, a big rise in public investment becomes an imperative to lift public sector net worth and so create, rather than diminish, fiscal credibility.

Nor is there going to be much of an investment boom with the UK outside the EU

Nor is there going to be much of an investment boom with the UK outside the EU, membership of which, according to the great economic historian Professor Nick Crafts, raised our GDP by between 8% and 10% – a gain that is unravelling.

Britain has to signal that its long-run intent is reassociation with Europe. Perhaps one of the few bright spots in darkening global geopolitics is that it makes initiating and joining a European collaborative defence and security pact an imperative, as the security expert Julian King argues. The pact, easily sellable to the British public as a necessity and first step in getting closer to Europe, will doubly signal to the world’s multinationals that the UK is part of the EU bloc, to expect regulatory alignment rather than dealignment and so suspend their investment strike. On tax, it is not so much the level of taxation – still below the international average – but its structure that is the problem. The wealthy do not contribute their proportional share. Britain needs current levels of taxation and perhaps fractionally higher to sustain public services and build up vital defence spending: but it must change the balance of who pays.

A strong economic recovery is in our own hands. The country is plainly minded to give Keir Starmer and Rachel Reeves the opportunity to govern. Of course the Labour leadership wants to try to guarantee electoral victory, especially after the traumas of the futile Corbyn years, but more important is to govern successfully having won.

Now is not the moment to close down options and surrender ground to a right that is trying to lock them into the same paradigm of failure it occupies – cheered along by a rightwing popular press more out of kilter with public opinion, as former editor of the Sun David Yelland says, than at any time since the 1930s. Tony Blair had the battle-cry education, education, education. Starmer should adopt investment, investment, investment as his. It is the only way forward.

• Will Hutton is an Observer columnist