Kwarteng’s plan to increase growth “could take a decade to reach the goal”

Kwarteng’s plan to increase growth “could take a decade to reach the goal”

    (Getty Images)

(Getty Images)

Economists have warned that Kwasi Kwarteng’s target of 2.5% annual GDP growth could be sidetracked by his own tax cuts in next week’s emergency budget.

Achieving sustainable growth at the level desired by the Chancellor would mean a clear departure from previous conservative austerity, with long-term investment in education, training and skills, reforms of tax and planning systems and incentives for businesses that would only gradually produce results, they said. The independent.

However, experts believe the tax cuts would lead to a “sugar rush” in demand that is more likely to produce higher inflation and interest rate hikes.

Mr. Kwarteng told Treasury staff after his appointment last week that he wants his department to focus “entirely on growth,” arguing that a return to the 2.5% trend of the period before the 2008 financial crisis would allow to the UK to curb its national debt growth.

It comes after Prime Minister Liz Truss’s criticisms of “treasury orthodoxy” and “abacus economics” which place balancing of accounts over generation of wealth.

But Paul Johnson, director of the Institute for Fiscal Studies (IFS) said it was “bizarre” to blame Treasury officials, rather than the decisions made by politicians to curb infrastructure investment, cut skills spending, and withdraw from. single EU market.

“The Treasury was the department that produced big spending increases when Blair and Brown were in office,” he said. “The thing that changed was the political leadership, not the civil service.

“If this is a new form of political leadership that focuses more on growth, then great. Growth is really, really important. But it is a bizarre thing to blame the orthodoxy of the Treasury, as opposed to the decisions that politicians have taken in the last period “.

Mr Johnson said “politically bold decisions” would be needed for the government to impact GDP growth and it will take some time for the impact to be felt.

“It is not possible to achieve sustainable growth of 2.5% this year or next year or next year,” he said. “These are long-term things. You could probably rebound growth next year by spending a whole bunch of money and possibly cutting taxes, but that’s not a sustainable path to growth.

“If you establish a truly determined and consistent strategy over the next five years, I think you could impact the growth rate by the end of the decade in a truly measurable way. But at least it’s giving the impression that you think you can get it much faster. “

James Smith, research director of the Resolution Foundation’s thinktank, agreed it would be a “multi-year challenge” to reverse the UK’s slow growth, which the Organization for Economic Co-operation and Development (OECD) says will drop to zero in 2023.

The international organization indicated significant room for improvement in the UK, which has 10% lower productivity and 16% lower GDP per capita than the best performing OECD.

“It’s right for the government to focus on increasing growth, it’s right in terms of living standards and diagnosing what the country needs,” Smith said.

“But that’s easier said than done. This is not something they will be able to do overnight. It is not something that a series of tax cuts will achieve.

“It’s about having a coordinated strategy that connects building the UK’s strengths in areas like services with skills policy, competition policy, trade policy, all in a coherent way.

“You would be talking about a five to 10 year period in terms of generating that kind of improvement, even if you have a really cohesive large-scale program.”

Kwarteng may be able to provide a “sugar demand rush” with tax cuts in next week’s fiscal event, but this is more likely to produce higher inflation and interest rate hikes than the kind of improvements. sustained to the GDP the country needs, he said.

Nobel Prize-winning economist Professor Sir Christopher Pissarides of the London School of Economics said it was “old fashioned” for the Treasury to aim for growth rates that it has little direct means to influence.

“If it can be successful, I’m doubtful,” he said. “In fact, I think the numbers are unrealistic, but even more unrealistic is the idea that the Treasury will have GDP growth targets.

“He shouldn’t have it. It should address the other issues of the labor market and the economy in general which relate to investment and job creation. Once you do that, the economy will give you the growth rate it can sustain. “

Professor Pissarides, who chairs the Institute for the Future of Work, said ministers should address the gap in the UK labor market between low-paid, low-satisfaction jobs at bottom and huge rewards for those who benefit. of the introduction of new technologies at the top.

The polarization of rewards was pushing large numbers of people to give up the job market in a way that held back growth, he said.

“I wouldn’t cut taxes,” he said. “If they took that money and spent it to create jobs and support measures for new technology in small businesses, it would have a much greater impact.

“Technology is the big factor we have to influence now: the adoption of digital technologies, artificial intelligence, robotics. Britain is behind its main competitors in all of this ”.

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