It would take Boris Johnson two full terms as prime minister to fulfil his pledge to “level up” the British economy, according to one of the UK’s leading economic thinktanks.
The National Institute of Economic and Social Research (NIESR) said Johnson’s plans would probably take more than a decade to raise the level of economic output across the country, due to capacity constraints.
In a warning before next month’s budget, Britain’s oldest economic thinktank said the government’s plan to raise investment in infrastructure projects by about £20bn per year would have only a modest impact on the UK’s dismal productivity levels.
Sajid Javid, the chancellor, is expected to outline plans for a rise in government spending in order to meet Johnson’s promise made before the election.
In a central plank of the Conservative party campaign, Johnson pledged to invest in new transport projects and other large public works to narrow the gap between the UK’s wealthiest cities and poorer regions.
However, NIESR said the plan would take a decade to deliver and would fail to offset the damage to economic growth from Brexit.
The positive impact on the economy from higher spending on infrastructure would be less than 0.5% of GDP over the long run, compared with an estimated 3-4% cost of Brexit, it added.
Faced with employment at record levels and labour shortages for companies, the thinktank said the government could struggle to implement its plans.
It warned that a rapid increase in spending risked driving up inflation, which could lead to the Bank of England raising interest rates. It also cautioned that a slower increase in spending risked disappointing voters who expected an immediate impact from the Tories’ election promises.
However it said spending could be targeted at parts of the country where unemployment rates are above the national average, including the north-east of England, Yorkshire, the Midlands and Wales.
In a blow to the chancellor, NIESR said Javid would also fall short of achieving his growth target of 2.8% per year, while his new budget rules made before the election would probably be trashed by public spending at the levels promised in the campaign.
GDP growth is expected to be 1.3% this year, the same as in 2019, before a rise to 1.6% in 2021.
Javid outlined spending rules to balance the government’s current account budget – which would match day-to-day government spending with tax income – by the middle of the next parliament, and to set a limit on borrowing for infrastructure investment of no more than 3% of GDP.
However NIESR said the rules appeared arbitrary and were at risk of being broken unless tax increases are brought in, therefore clashing with the levelling-up strategy.
Jagjit Chadha, the director of the NIESR, suggested the government needed to be more honest about the speed with which it could tackle longstanding regional divisions and drive up living standards.
He said: “[Spending] cannot be turned on like a very fast tap. The key thing is it takes a long time. It’s not going to quickly help capacity.
“A hurried fiscal boost may be stymied by a current lack of capacity in the economy, or possibly by creating unrealistic short-term expectations about the extent to how quickly that can bring about an increase in living standards.”
The warnings come after the Bank of England sounded the alarm that Brexit would strike a blow to the productive capacity of the UK economy, as higher trade barriers harmed efficiency gains.
Threadneedle Street also warned that Britain could grow at about only 1.1% on average until 2023 without driving up inflation, far below Javid’s target and about half the rate recorded before the EU referendum.
