Business Maverick

Business Maverick

UK risks ‘decade in the doldrums’ without investment, think tank warns

UK risks ‘decade in the doldrums’ without investment, think tank warns
Residential homes in view of BT Tower and the London Eye at Denmark Hill, London, UK, on Thursday, 27 July 2023. (Photo: Hollie Adams/Bloomberg)

Britain faces “a decade in the doldrums” with poor growth and worsening regional inequalities unless the government steps up the level of public investment, the National Institute of Social and Economic Research said.

The economic think tank on Wednesday warned against cutting taxes before the election, arguing that it’s far more important for the country’s long-term prospects to lift productivity by investing more.

The findings accompanied projections indicating sputtering economic growth will slow next year. Members of Prime Minister Rishi Sunak’s Conservative Party want tax cuts to lure back support ahead of an election widely expected next year but economists warn that Britain must fix longer-term problems.

“The lack of public investment is a large part of the UK’s slow growth story,” said Stephen Millard, deputy director for macroeconomic modeling. “That’s what they should be doing. We don’t want to see a pre-election tax giveaway.”

NIESR added that England’s regions would fall further behind without direct investment. “Regional inequality that has been entrenched since the 1970s is likely to persist with little trickle down from richer to poorer parts of the country,” said Jagjit Chadha, NIESR’s director.

A separate report from the Recruitment & Employment Confederation and KPMG showed demand for staff declining at the slowest pace in four months. It also showed lingering upward pressure on pay, a concern for the Bank of England, which is trying to head off a wage-price spiral. 

In a sign that the UK’s tight labor market is easing, the increase in salaries was only in line with the long run average and the pace of growth the slowest in 31 months. 

“The jobs market is facing a cyclical challenge,” said Claire Warnes, a partner at KPMG UK. “There are people out there who want to work, and there’s a decent availability of candidates, but they often do not have the right skills for the roles on offer. This means higher starting salaries are still being offered.” 

NIESR’s latest quarterly forecasts come just weeks ahead of the autumn fiscal statement from Chancellor of the Exchequer Jeremy Hunt. The research group expects growth of just 0.6% and that to slide to 0.5% in 2025.

Slow growth, it said, is partly due to higher interest rates, which the Bank of England has raised from 0.1% to 5.25% since December 2021. NIESR expects inflation to drop to 5.1% in October, from 6.7%, then to 3.9% at the end of 2024 and hit the 2% target in 2025. Official inflation data for October is due next week.

“Monetary policy has done its job – we don’t expect any more increases in rates,” Millard said. NIESR predicts rates to drop to 3.5% by 2027, a much sharper drop than what financial markets have priced in.

NIESR said the government’s main challenge is to fix the UK’s investment shortfall by raising public investment from 2% to 3% of gross domestic product a year. It estimates that Hunt may have as much as £90-billion ($111-billion) of headroom at the autumn statement to invest.

The figure is far higher than the £13-billion estimated by the Resolution Foundation think tank and the record low £6.5 billion the chancellor had in March. NIESR said the difference reflected its higher estimate of nominal GDP, which is affected by inflation projections.

It expects house prices to fall 6.5% from peak to trough by the middle of 2025, though that drop would be less severe than previously forecast. That will push another 50,000 households into negative equity, taking the total to 166,000 – about 1.5% of all mortgage borrowers.

Household incomes for workers on between £16,000 and £32,000 a year will not recover to pre-pandemic levels until 2026 but the increase in the national living wage to over £11 an hour will reduce destitution and improve the incentives for those on the lowest incomes to return to the labor force, NIESR said.


Comments - Please in order to comment.

Please peer review 3 community comments before your comment can be posted