Britain Urged to Prioritize Investment Over Tax Cuts to Boost Economy, Says Think Tank
Britain’s finance minister, Jeremy Hunt, has been advised to resist the temptation of pre-election tax cuts and instead focus on increasing investment in areas such as infrastructure and skills to revive the economy, according to a report by the National Institute of Economic and Social Research (NIESR).
The think tank highlighted that, based on current trends, it will take until the end of 2026 for the bottom 50% of earners in the country to see their incomes return to pre-pandemic levels when adjusted for inflation. To accelerate economic recovery, NIESR suggested increasing public investment to 3% of gross domestic product (GDP) annually and offering incentives for companies to invest more.
While public investment in Britain is expected to reach around 3% of GDP this year, it is projected to decline to approximately 2% in the coming years, resulting in an annual difference of around £30 billion ($37 billion).
Stephen Millard, a deputy director at NIESR, emphasized the importance of increasing public investment, stating, “Certainly if the government has the fiscal space to do that, that is what they should be doing. What we do not want to see is a pre-election tax giveaway.”
However, Hunt has cautioned lawmakers from his own Conservative Party that significant tax cuts cannot be implemented in his upcoming budget update speech on November 22. His focus remains on combating high inflation. Despite this, analysts believe that tax cuts are likely to be introduced before the election, which must be held by January 2025, as the Conservatives currently lag behind the opposition Labour Party in opinion polls.
The Labour Party has pledged to boost business investment and establish a national wealth fund to attract private investment. Meanwhile, the government has already unveiled reforms aimed at encouraging large pension funds to invest in infrastructure and is reportedly considering additional incentives for business investment.
Adrian Pabst, another deputy director at NIESR, stressed the need for closer collaboration between regional and central government to enhance long-term investment in areas such as infrastructure, skills training, public housing, and social care.
Increasing public investment would not only stimulate private investment but also address Britain’s weak productivity growth, which is crucial for raising living standards in the long term, Pabst added.
NIESR’s forecasts indicate that Britain’s economy is expected to grow by a modest 0.6% and 0.5% in 2023 and 2024, respectively, before experiencing growth rates of 1.0% in 2025 and 1.7% by 2028. However, these figures still fall below the average levels seen prior to the 2008-09 financial crisis.
Millard suggested that Hunt is likely to have enough fiscal leeway to increase public investment, aided by the erosion of nominal debt due to high inflation. NIESR’s projections anticipate that inflation will decline to 2% by the end of 2025, aligning with the Bank of England’s estimates. The think tank also predicts that the Bank of England’s benchmark interest rate has already reached its peak at the current level of 5.25% and will stabilize between 3% and 3.5%.
Overall, NIESR’s report underscores the significance of prioritizing investment over tax cuts to rejuvenate the UK economy, urging the government to seize the opportunity to bolster long-term growth and address income disparities.
More detail via Reuters here… ( Image via Reuters )
