New Labour architect issues 'doom loop' message as Rachel Reeves may need £25bn in tax rises

The UK needs to transform itself into a high investment economy to shift out of its low growth “doom loop”, one of the architects of New Labour will claim.

Lord Mandelson, one of the key figures in transforming the Labour Party under Tony Blair and who went on to serve in the Cabinet, will hit out at “persistent underinvestment”.

His comments come after a report by the Institute for Public Policy Research (IPPR) found the UK has been bottom of the league in the G7 group of major economies when it comes to investment for 24 out of the past 30 years.

Lord Peter Mandelson at St Mary the Virgin church in Primrose Hill, north west London. Picture: Jonathan Brady/PA Wire | PA

Countries like Slovenia, Latvia and Hungary all attract higher levels of private sector investment than the UK as a per cent of GDP, the think-tank revealed.

Lord Mandelson, who served as business secretary in Gordon Brown’s government, will use a speech in Edinburgh today to claim this low level of investment is linked to falling productivity in the UK.

Speaking ahead of Chancellor Rachel Reeves’ first Budget later this month, the Labour peer will speak at an event organised by the Reform Scotland think-tank.

There he is expected to argue the UK needs to “appreciate - and measure - the value of investment, rather than merely the cost of it”.

And, claiming that “Brexit means that we are, for now, driving with an economic handbrake on”, he will argue the impact of leaving the European Union means administrations across the UK need to get every area of economic policy right, including industrial policy, infrastructure, planning, skills, science and innovation, regulation, and migration by skilled workers.

However, he will say that getting the UK government’s economic growth strategy right will mean the UK becomes “the most dynamic economy in Europe”.

This will mean that while the UK is “damaged by Brexit”, it would not be “defined by it” and would be “still the most attractive European market for private and venture capital”.

The UK government has been contacted for comment.

The speech comes as the Institute for Fiscal Studies (IFS) estimates Ms Reeves may need to raise up to £25 billion from tax increases if she wants to keep spending rising with national income,

Even if the Chancellor changes the debt rule she inherited from the Tories, this would do “almost nothing” to ease the challenge on public service funding, the IFS said as it released its Green Budget report.

Because of her promise to meet day-to-day spending out of revenues, Ms Reeves would still need to turn to tax rises to avoid spending cuts and meet her pledge to borrow only to invest.

IFS director Paul Johnson said Ms Reeves’ first Budget could be “the most consequential since at least 2010”. The report, funded by the Nuffield Foundation and using economic forecasting by Citi, concluded if there were no cuts to spending outside of public services, Ms Reeves would need a tax rise of £16bn to remain on course to balance the budget in 2028/29.

This would be on top of the £9bn tax rise from measures set out in Labour’s manifesto – adding up to almost £25bn in total.

But the party’s pledges not to raise income tax and corporation tax or to increase National Insurance or VAT mean she may struggle to implement a tax rise on that scale.