Kwasi Kwarteng’s target of 2.5 per cent annual GDP growth could be knocked off course by his own tax cuts expected in next week’s emergency budget, economists have warned.
Delivering sustainable growth at the level sought by the chancellor would mean a sharp departure from previous Conservative austerity, with long-term investment in education, training and skills, reforms to the tax and planning systems and incentives for business that would only gradually produce results, they told The Independent.
However, experts believe rumoured tax cuts would lead to a “sugar rush” of demand that is more likely to deliver higher inflation and interest rate rises.
Mr Kwarteng told Treasury staff after his appointment last week that he wants his department to focus “entirely on growth”, arguing that returning to the 2.5 per cent trend of the period before the 2008 financial crisis would allow the UK to bear down on its ballooning national debt.
It comes after criticism by prime minister Liz Truss of “Treasury orthodoxy” and “abacus economics” which put balancing the books ahead of wealth generation.
But Paul Johnson, director of the Institute for Fiscal Studies (IFS) said it was “bizarre” to blame Treasury officials, rather than the decisions taken by politicians to rein in infrastructure investment, cut back spending on skills and withdraw from the EU’s single market.
“The Treasury was the department that delivered big spending increases when Blair and Brown were in charge,” he said. “The thing that changed was the political leadership, not the civil service.
“If this is a new form of political leadership, which is putting more focus on growth, then good. Growth is really, really important. But it’s a bizarre thing to blame it on Treasury orthodoxy, as opposed to the decisions that politicians have been making over the last period.”
Mr Johnson said that “politically brave decisions” would be required for the government to have an impact on GDP growth, and it would take time for the impact to be felt.
“You cannot get sustainable growth of 2.5 per cent this year or next year or the year after,” he said. “These are long-term things. You could probably bounce growth up next year by spending a whole pile of money and maybe by cutting taxes, but that is not a sustainable route to growth.
“If you set about a really determined and coherent strategy over the next five years, then I think you could impact on the rate of growth by the end of the decade in a way that is genuinely measurable. But he’s at least giving the impression that he thinks you can achieve that a lot more quickly.”
James Smith, research director of the Resolution Foundation thinktank agreed it would be a “multi-year challenge” to turn round the UK’s sluggish growth, which the Organisation for Economic Co-operation and Development (OECD) has forecast will slump to zero in 2023.
The international organisation has indicated significant room for improvement in the UK, which has productivity 10 per cent below and GDP per capita 16 per cent below the OECD’s best performers.
“It’s right for the government to focus on raising growth, it’s right in terms of living standards and a diagnosis of what the country needs,” said Mr Smith.
“But it’s easier said than done. This is not something they’re going to be able to do overnight. It’s not something that one set of tax cuts will achieve.
“It’s about having a co-ordinated strategy that links building on 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 period of five to 10 years in terms of generating that sort of improvement, even if you have a genuinely large-scale cohesive programme.”
Mr Kwarteng might be able to deliver a “demand sugar rush” with tax cuts in next week’s fiscal event, but this is more likely to deliver higher inflation and interest rate rises than the kind of sustained improvements to GDP the country needs, he argued.
Nobel-prize winning economist Professor Sir Christopher Pissarides of the London School of Economics said it was “old fashioned” for the Treasury to be targeting growth rates which it has little direct means of influencing.
“Whether he can succeed, I’m doubtful,” he said. “In fact, I think that the numbers are unrealistic, but even more unrealistic is the idea that that the Treasury will have targets for GDP growth.
“It shouldn’t have that. It should be addressing the other issues in the labour market and the overall economy that are about investment and job creation. Once you do those, then the economy will give you the rate of growth that it can support.”
Prof Pissarides, who chairs the Institute for the Future of Work, said ministers should be addressing the gap in the UK labour market between low-pay, low-satisfaction jobs at the bottom and enormous rewards for those benefiting from the introduction of new technologies at the top.
The polarisation of rewards was driving large numbers of people to opt out of the job market in a way that was a drag on growth, he said.
“I wouldn’t be cutting taxes,” he said. “If they took that money and they spent it on job creation, and support measures for new technology in small businesses, it would have a much bigger impact.
“Technology is the big factor that we need to influence now – the adoption of digital technologies, artificial intelligence, robotics. Britain is behind its main competitors in all this.”
