The UK think tank urges Hunt to invest in the economy, not tax cuts

British Chancellor of the Exchequer Jeremy Hunt attends the annual conference of Britain’s Conservative Party in Manchester, Britain on October 2, 2023. REUTERS/Hannah McKay/File Photo Get license rights

LONDON, Nov 8 (Reuters) – Britain’s Finance Minister Jeremy Hunt should resist a push for pre-election tax cuts and instead boost investment in sectors such as infrastructure and skills, a think tank said.

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

The best way to speed up a weak economy is to increase public investment to 3% of GDP every year and provide incentives to companies to invest more.

British public investment will be 3% of GDP this year, but will fall to roughly 2% in coming years, a difference of about 30 billion pounds ($37 billion) a year.

„Certainly if the government has the financial space to do that, that’s what they should do. What we don’t want to see is a pre-election tax giveaway,” NIESR deputy director Stephen Millard said.

Hunt warned his fellow Conservative lawmakers in his Nov. 22 budget update speech that he would not be able to cut taxes significantly as he focused on reducing high inflation.

But analysts believe the tax cuts could come before an election due in January 2025, with the Conservatives trailing far behind opposition Labor in opinion polls.

It has pledged to boost business investment and create a national wealth fund to leverage private investment. The government has unveiled reforms to encourage large pension funds to invest in infrastructure and is reportedly considering new business investment incentives.

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Adrian Pabst, another deputy director of NIESR, said regional and central governments should work more closely together to increase long-term investment in infrastructure, skills training, public housing and social protection.

More public investment will encourage more private investment and boost Britain’s weak manufacturing growth, which is key to raising living standards in the long term, he said.

NIESR expects Britain’s economy to expand by a weaker 0.6% and 0.5% in 2023 and 2024, respectively, to 1.0% in 2025 and 1.7% in 2028, below the average before the 2008-09 financial crisis.

But Hunt would probably have enough fiscal wiggle room to boost public investment, helped by the erosion of nominal debt from high inflation, Millard said.

NIESR’s projections are in line with the Bank of England’s projections, with inflation falling to 2% by the end of 2025. NIESR said the BoE’s benchmark interest rate may have peaked at its current level of 5.25% and will stabilize between 3% and 3.5%.

($1 = 0.8133 pounds)

Written by William Schomberg, edited by Andy Bruce

Our Standards: Thomson Reuters Trust Principles.

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