Labour's Growth Goal Requires Increased Investment, Says NIESR
The Labour government's ambitious goal of achieving 2.5% economic growth is unlikely to be realized without a significant increase in annual investment, according to the National Institute of Economic and Social Research (NIESR). The independent think tank argues that an additional £50 billion in investment is necessary to reach the desired growth target.
NIESR's warning comes amidst speculation that Chancellor Rachel Reeves may adjust the definition of public debt to free up additional funds for the October budget. However, economists like Ben Zaranko of the Institute for Fiscal Studies believe that a more transparent approach would be to advocate for increased borrowing to finance public investment, rather than resorting to "fiscal jiggery-pokery."
The current fiscal rules, which mandate a reduction in the debt-to-GDP ratio within five years and a balanced current budget, have been criticized for stifling public investment. NIESR argues that doubling public investment as a share of GDP to 5% is crucial to boost productivity and economic growth.
The think tank also highlights the UK's sluggish underlying growth potential, estimated at around 1% per year without intervention. Despite the Bank of England's recent interest rate cut, further reductions are unlikely this year. NIESR forecasts that the UK economy will grow by 1.1% in 2024, with inflation ticking back up in the second half before stabilizing at the Bank's target.
Stephen Millard, deputy director at NIESR, emphasizes the need to address low investment and productivity growth. He suggests that either taxes or borrowing will need to increase to improve public services, potentially requiring a reshaping of the existing fiscal rules.
Last week, Chancellor Reeves announced cuts to public investment projects and the winter fuel allowance for pensioners as part of fiscal consolidation efforts. The Treasury acknowledges the significant challenges faced, including a £22 billion deficit inherited from the previous administration. They emphasize their commitment to taking tough decisions to rebuild the economy and improve the lives of all citizens.