U.K. Government Economic Growth Targets Called Into Question

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(Bloomberg) --

Chancellor of the Exchequer Sajid Javid’s ambition to lift U.K. economic growth toward its post-war average of almost 3% a year is “quite unrealistic.”

The warning from the National Institute of Economic and Social Research Thursday comes days after the Bank of England cast doubt on the commitment recently made by Javid, as Prime Minister Boris Johnson’s government seeks to deliver on its pledge to “level up” poorer regions of the country.

Javid wants to improve productivity and bolster growth to between 2.7% and 2.8% a year. His budget on March 11 is expected to include billions of pounds of new infrastructure projects for northern England and the Midlands, where lifelong Labour supporters backed Johnson’s Conservatives in the December general election.

“We’ve looked at the impact of the proposed policies and think they’re unlikely to provide a seismic boost to productivity or offset the impact of Brexit,” Arno Hantzsche, principal economist at Niesr, told reporters in London.

U.K. growth is likely to be 1.3% this year and 1.6% in 2021, Niesr said, as uncertainty relating to talks on a post-Brexit trade deal with the EU acts as a continuing drag. The BOE is more pessimistic, predicting growth of less than 1% in 2020 -- the weakest since the financial crisis.

Investment Plans

The government has already announced that it wants to increase public investment by 20 billion pounds ($26 billion) a year over the course of the current five-year Parliament. This would be “far from sufficient to raise potential growth,” Hantzsche said, and would fail to offset the negative impact from Brexit.

Fiscal stimulus announced in the budget is likely to support growth from 2021, Niesr said. To achieve Javid’s target, productivity in the regions would have to expand by more than 3% a year, more than the efficiency gains seen in the whole economy since 2007.

“All of this is not to say that the government should not aim for higher investment, or aim to support growth potential in the long run or address regional inequality,” Hantzsche said. “It should do all of these things, but we think it is important for the government to have goals that are attainable, that seem realistic.”

Fiscal rules may have to be revisited in order to enable growth-enhancing public investment, Niesr said. The current requirement that day-to-day spending and revenue are in balance within three years leaves no wiggle room without tax rises, and the target will be missed by 10 billion pounds, according the group’s forecast.

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