NIESR urges Hunt to invest in economy, not tax cuts

The best way to speed up the weak economy would be to raise public investment to 3 per cent of GDP every year and offer incentives for firms to invest more too, NIESR said

UK's finance minister Jeremy Hunt must resist the temptation of pre-election tax cuts and instead boost investment in areas like infrastructure and skills to snap the economy out of another decade in the doldrums, a think tank said.

On current trends, the bottom 50 per cent of earners in the country will not see their inflation-adjusted incomes return to pre-pandemic levels until the end of 2026, the National Institute of Economic and Social Research said on Wednesday.

The best way to speed up the weak economy would be to raise public investment to 3 per cent of GDP every year and offer incentives for firms to invest more too, NIESR added.

British public investment is set to be around 3 per cent of GDP this year but will drop to around 2 per cent in coming years, a difference of nearly £30 billion pounds annually.

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, Stephen Millard, a NIESR deputy director, said.

Hunt has cautioned lawmakers from his Conservative Party that he cannot cut taxes significantly in his November 22 budget update speech as he focuses on bringing down high inflation.

But analysts believe tax cuts are likely before the election which must be held by January 2025, with the Conservatives lagging far behind the opposition Labour Party in opinion polls.

Labour has promised to raise business investment and to create a national wealth fund to leverage private investment. The government has unveiled reforms to encourage big pension funds to invest in infrastructure and is reportedly considering new business investment incentives.

Adrian Pabst, another NIESR deputy director, said the government should get regional and central government working more closely together to boost long-term investment in infrastructure, skills training, public housing and social care.

Higher public investment would encourage more private investment and improve Britain's weak productivity growth which is key to lifting living standards over the long term, Pabst added.

National Institute of Economic and Social Research said it expected Britain's economy would expand by a weak 0.6 per cent and 0.5 per cent in 2023 and 2024 before growth increases to 1.0 per cent in 2025 and 1.7 per cent by 2028, still below average levels before the 2008-09 financial crisis.

But Hunt will probably have sufficient fiscal wiggle room to raise public investment, helped by the erosion of nominal debt by high inflation, Millard added.