The next government should prioritise long-term public investment in order to rekindle sluggish economic growth, a leading think tank has said.
Over recent weeks a number of forecasters have painted a bleak picture for the UK economy over the coming years and new quarterly forecasts from the National Institute of Economic and Social Research (NIESR) were not much better.
According to NIESR, GDP will grow 0.6 per cent this year before falling to 0.5 per cent next.
“The bottom line is that the UK is chugging along really slowly,” Stephen Milliard, NIESR’s deputy director for macroeconomic modelling and forecasting, said.
This comes after more than a decade of below-trend growth in the aftermath of financial crisis, which stemmed from poor productivity growth.
In order to break down the trend of sluggish growth, NIESR urged whoever wins the next election to ramp up public investment, arguing it was a much more effective way of stimulating growth than tax cuts.
It highlighted that the government would have “some room for a more expansionary fiscal stance” thanks to the impact of inflation. Inflation erodes the nominal value of debt and drags more taxpayers into higher tax brackets.
The think tank estimates that the Chancellor has £90bn of headroom to meet his fiscal rules, a far higher estimate than other forecasters.
With the extra headroom, NIESR suggested that the next government should increase public investment to an annual level of three per cent of GDP. It also suggested that incentives could be offered to firms to encourage further investment, such as making the full expensing of investment permanent.
“Capital spending on physical and digital infrastructure as well as housing will not just boost economic growth and productivity but also help unlock more business investment on which shared prosperity and well-being depend,” the report said.
Milliard pointed out that the multiplier on government investment was much greater than on government consumption, although it takes a long time for those benefits to feed through.
“The multiplier on increases in government consumption spending is less than one (between around 0.5 and one) whereas the multiplier on increases in government investment is somewhere between two and ten,” he said.
The multiplier measures the impact of a policy on GDP relative to the cost of the intervention.