(Aug 7): The UK’s new Chancellor of the Exchequer made kick-starting her country’s anemic economy a defining mission. But her first actions in the job may put that goal further out of reach, according to two respected research groups.
From cutting investment in what the National Institute of Economic and Social Research (NIESR) called a “worrying signal,” to her caution around ripping up the rules governing the fiscal purse, economists are concerned that Rachel Reeves’s first policy positions risk creating a straitjacket that would constrain the potential for long-term growth.
“Unless the budget really makes the case for capital spending, then it’s not clear where growth is coming from,” said Adrian Pabst, deputy director at NIESR. “It’s a mistake to begin with pausing capital spending because it sends a worrying signal.”
Reeves used an audit of the public finances last week to reduce investment in some road and rail projects while highlighting plans for a tight-fisted budget on Oct 30. There’s speculation she could find some extra money by tweaking her fiscal rules to use a different measure of debt, but that change wouldn’t find enough to avert some difficult decisions.
The episode has left researchers worried Reeves will both undermine the credibility of her debt rules while lacking the boldness to unlock investment needed to deliver the lofty ambition the new government has to make Britain the fastest growing nation in the Group of Seven.
Labour has promised to stick rigidly to rules that require debt to fall as a share of GDP in the fifth year of the forecast. It tried to reassure voters of its prudence in the election campaign after being saddled with blame following the financial crisis more than a decade ago and watching Liz Truss’s premiership blown up with an adventurous fiscal policy.
The Institute for Fiscal Studies (IFS) said Reeves would be “moving the fiscal goalpost” by switching away from the measure of debt that excludes what’s on the books at the Bank of England. But that move could generate £16 billion (RM91.39 billion) of extra headroom.
“If the government wants to borrow more and spend more, especially on public investment, then it would ideally make the case for doing so on its own terms, rather than hide behind fiscal jiggery-pokery,” the IFS said.
NIESR also called for a much bolder approach from Britain’s first female Chancellor. It urged her to boost capital spending by £50 billion to fire up the UK economy after a growth-sapping dearth of investment from both the public and private sector since the financial crisis. The researcher also wants Reeves to exclude investment from her debt rule as the budget guidelines threaten to suffocate spending on infrastructure.
Pabst warned that the low public investment levels compared to some major economies risk the UK becoming “trapped” in “low investment, low growth (and) flatlining productivity.”
NIESR’s summer forecasts predicted tepid growth in the years ahead, picking up to 1.1% this year and 1.3% in 2025.
Even with the economy expanding at a historically tepid pace, NIESR said that growth could be too strong for the Bank of England to keep inflationary pressures contained.
It warned that this would still be above its estimate for the medium-term trend growth rate of 1%. NIESR said that this means the BOE risks stoking inflation again if it cuts interest rates as quickly as markets expect.
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