Will austerity soon be at an end?

Is austerity over? At least, in terms of macroeconomics?

Last week the National Institute of Economic and Social Research, a think-tank, forecast that higher public spending is set to boost UK economic growth over the next five years as plans to cut further are “not credible”.

“The government’s spending plans to reduce total managed expenditure to below 38 per cent of [national income] . . . are not credible when the population is ageing and public sector pay is below the level needed to recruit and retain a skilled workforce,” they wrote.

Generally the UK is comfortable with the government spending around 40 per cent of national income, the think-tank argues, and current plans to shrink the state even further will inevitably meet political pushback.

The authors of the report point to their previous correct forecasts that the government would end up spending more than it anticipate, for example the release of extra funds to alleviate the social care crisis.

So they predict that government consumption will add about half a percentage point a year to overall growth in national income for the next five years. That compares to an average of about 0.1 percentage points for the previous half a decade.

However, while the government will spend a bit more, they forecast a roughly equivalent belt-tightening in the household sector as consumers rebuild their savings after a few years of borrowing and spending.

That all means Britain may feel pretty austere for a while yet.

This week’s calendar

Wednesday

9.30: Manufacturing purchasing managers’ index (April)

Economists will be watching for any signs of a hangover in the factory PMI. In March, manufacturers increased production to build stockpiles of finished goods and inventories ahead of a potential “no-deal” Brexit. Once Britain’s exit from the EU was delayed, companies may have scaled back production and run down their inventories instead.

Thursday

9.30: Construction PMI (April)

Construction stagnated in March, according to the PMI survey. Executives who responded to the poll said they were waiting for more clarity on Brexit before going ahead with new projects.

12.00: BoE interest rate decision and inflation report

While inflation is close to target, unemployment is around the level the Bank of England thinks it should be and there are signs of increasing wage pressure, economists are expecting no change in interest rates until there is more political stability. The inflation report, published alongside the decision, will give the nine-strong committee a chance to spell out their thinking.

Friday

9.30: Services PMI (April)

The services industry contracted in March, at least that’s what the PMI survey said, with order books shrinking at the fastest rate since the financial crisis. I will be watching to see whether that continued during April or was just reflecting the industry’s gloom over the possibility of an imminent disorderly exit from the EU.

Last week’s highlights

Everyone’s talking about: the next governor

The search for the next governor of the Bank of England began last week as the government posted an advertisement for the role, which comes with an annual salary of £480,000. Chris Giles, FT economics editor, profiles the six figures who stand out as candidates.

While in Washington DC for the spring IMF meetings Raghuram Rajan, one of the favourites for the job, spoke to Alphaville about his new book The Third Pillar: How Markets and the State Leave Communities Behind. Listen to the podcast here.