The Labour government’s goal of raising economic growth to 2.5% may be unachievable without a substantial increase in annual investment, according to an independent think tank.
- An independent think tank, NIESR, warns that Labour needs to increase annual investment by £50 billion to meet its economic growth targets.
- Economists advise that changing debt definitions might create fiscal space but emphasise the need for clear fiscal policy.
- Critics argue that the current fiscal rules have stifled public investment, thereby impacting productivity and economic growth.
- Despite recent government steps, experts forecast sluggish underlying growth and a rise in inflation in the near term.
The National Institute of Economic and Social Research (NIESR) has raised concerns over the Labour government’s ability to achieve its economic growth target of 2.5% without substantial investment. The think tank stresses the necessity of increasing annual public investment by £50 billion, doubling it as a share of GDP to 5%.
Economists suggest that Rachel Reeves, the Chancellor, might change the definition of public debt to unlock additional fiscal resources. Ben Zaranko, a senior research economist at the Institute for Fiscal Studies, stated that Reeves should present a coherent case for increased borrowing rather than becoming entangled in technical debt definitions and discussions around fiscal headroom.
The Treasury currently covers any losses incurred by the Bank of England from selling bonds purchased through the quantitative easing programme. The Bank estimates that the Treasury may need to transfer £95 billion to cover these costs. This fiscal setup has drawn criticism for limiting public investment, crucial for productivity and economic growth.
NIESR argues that without intervention, the UK’s underlying growth potential will likely remain at about 1% per year. They have called for the government to reshape its fiscal rules to accommodate the necessary increase in public investment. The think tank also predicts that interest rates are unlikely to fall further this year after the recent cut to 5%.
Stephen Millard, deputy director at NIESR, emphasised that the new government has inherited an economy with low investment and productivity growth issues, which must be addressed. He pointed out that sectors like the motor trade would be severely impacted without significant investment. The recent decision to cut public investment projects and other fiscal consolidation measures aim to address the inherited £22 billion deficit.
Addressing the economic challenges will require substantial investment and possibly reshaping the current fiscal rules.
