The Government used new fiscal rules to guide the policy decisions at this Budget. This box discussed the composition of two of these rules which had not previously been used in the UK.

Public sector net investment (PSNI) consists of three main elements:

  • The largest – gross fixed capital formation (GFCF) – is what is normally thought of as capital spending. It is the net acquisition of fixed assets (such as roads, buildings and weapons systems) by the public sector, as well as a significant amount of R&D spending.
  • The depreciation of these assets forms the second largest component and is negative.
  • The remainder consists almost entirely of capital grants to and from the private sector. Some of these – for example grants for social housing – will be used to increase fixed assets in the private sector. Others – such as upfront recognition of student loan write-offs and the net assumption of pension liabilities by the Pension Protection Fund – will not.

Taken together GFCF minus depreciation (net fixed capital formation, NFCF) represents the cash increase in the public sector’s net capital stock. As Chart A shows, NFCF averaged around 4 per cent of GDP up to the 1970s, when the public sector included some major industries and investment in public housebuilding was much higher than it is today. It was much smaller, and occasionally negative, over the next two decades – when industries and much social housing left the public sector – before picking up to around 1 per cent of GDP on average so far this century. Government plans will lift NFCF to 1.2 per cent of GDP over the forecast. At an average of 1.6 per cent of GDP, capital grants are larger than NFCF over the forecast period (with capital transfers associated with student loan outlays reaching 0.5 per cent of GDP in 2024-25).

Chart A: Historical trends in public sector net investment


This box was originally published in Economic and fiscal outlook – March 2020