UK Economics: The Scope Is Tight

Research evidence excerpt

M

Update

August 5, 2026 07:55 AM GMT

UK Economics | Europe

Morgan Stanley & Co. International plc

Bruna Skarica

Chief UK Economist

The Scope Is Tight

The Times reported overnight that the Treasury was "drawing up plans...to

increase government borrowing and spend on [capex]". While there is some

wiggle room for engaging the private sector through institutions such as the

National Wealth Fund, we see the scope for a meaningful further ramp-up in

public capex as modest. The current fiscal framework is a big barrier to the

capex uplift at a scale comparable to the October 2024 Budget (£120 billion).

Flexing the rules: The Times reports that the Treasury is looking to use the

flexibility in the current fiscal framework in order to boost capex (the Treasury did

not comment on the article). We have written about that flexibility here. Since the

debt-to-GDP ratio that the UK is looking to stabilise is defined as "public sector net

financial liabilities", any loans that the public sector extends to the private sector

flatter the target, as they are a financial asset. Note, should the UK public sector

(central government or public banks) engage directly in borrowing in order to

procure physical assets, this would drive financial liabilities and physical assets up,

thus driving up net financial liabilities (i.e. debt).

The key to finding any flexibility in the current fiscal framework is in engaging the

private sector. The central government could, for example, borrow (public sector

financial liability) to allow for greater lending capacity of its public banks (British

Business Bank, the National Wealth Fund, the National Housing Bank), which would

then provide grants, guarantees, loans and make equity investment in the private

sector (public sector financial asset). Financial liabilities and assets thus net out, but

the provider of any capex is the private sector. For more on how the public and the

private sector engage to find alternatives to direct public capex in the UK, see here.

Reporting in context: The reporting leans on previous work by the think tank

Resolution Foundation, which suggested a ramp-up of the lending capacity of the

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