Money

Javid’s £100bn spending pledge will not ‘level up’ UK


The chancellor’s plan to invest an extra £100bn in skills and regional infrastructure will not be enough to meet his pledge to “level up” economic opportunity across the UK, an influential think-tank has argued.

The National Institute for Economic and Social Research estimates that even if Sajid Javid manages to increase public investment rapidly from around 2 per cent to 3 per cent of gross domestic product, equivalent to an extra £20bn a year, this would have only a modest impact on long-term productivity and economic output.

In its latest forecasts for the UK economy, the think-tank said that new investment on this scale, sustained over five years, would boost economic output by 0.3-0.4 per cent in the short term, but the impact would only last for around four to five years.

In the long run, it could raise the level of productivity by around half a per cent, helping to narrow wage gaps across the country if the money spent was well-targeted, Niesr said — but added that the long-run boost of around half a per cent to the level of GDP would not be enough to offset the 3-4 per cent loss it expects as a result of Brexit.

“I am concerned that the amount of money they are talking about may not be enough,” said Garry Young, Niesr’s director of macroeconomic forecasting.

If the chancellor’s goal is to restore pre-crisis levels of growth in national GDP, while still levelling up the regions, that would imply productivity growth of around 1 per cent in London and above 3 per cent in all other regions, Niesr said — a rate achieved by only two of 168 local areas since 2010.

One reason the chancellor may see limited returns on his investment drive is the tight state of the labour market. With the UK economy already growing close to the rate it can sustain without excess inflation, a burst of public sector activity could crowd out some activity in the private sector.

Mr Young said this “crowding out” effect would be smaller if the government managed to target its spending on parts of the country where unemployment was higher and the room for improvement was greater.

But he said the scope to raise public investment could also be constrained by limits on day-to-day spending. Mr Javid’s new fiscal rules allow public investment to rise to 3 per cent of GDP but oblige him to balance the current budget within three years.

Most public investment projects require higher current spending as well as capital investment, Niesr argues — with new schools and hospitals needing staff to run them.

Unless Mr Javid is willing to raise taxes, he could find himself “boxed in” by the conflict between the government’s election pledges on new investment, and its proposed fiscal rules, Mr Young said.



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