Sluggish British Economy: ALEX BRUMMER Criticizes Frequent Government Policy Changes as the Cause
Reduced Growth and Chronic Under-Investment Ideally Alleviated by Government Policies: IMF
The British economy's growth remains modest, according to the International Monetary Fund (IMF), following a recent evaluation. The UK government's growth-stimulating proposals, such as planning reforms and infrastructure expansion, are held up in the slow lane of 'formulation and consultation.'
Prime Minister Keir Starmer's administration experiences pressure from both the Left and Right on welfare policies, hindering progress. Policies like winter fuel allowance adjustments and the two-child limit on benefits have yet to yield noticeable changes in economic growth.
Unfortunately, Labour has limited fiscal leeway to accommodate shifts in global conditions or the national agenda, leaving little room for flexibility. The government's budgetary decisions have been concentrated in a single annual event, which has led to a series of mid-course adjustments. A multi-year public spending review is scheduled for June 11.
The UK's output is currently 25% below its potential output level, pre-Great Financial Crisis trend growth maintained. The IMF attributes the slowdown to multiple factors, including chronic under-investment, low levels of private R&D, limited access to finance, skills gaps, and a deterioration in health outcomes.
Longstanding challenges in the area of innovation, typically a UK strength, are a cause for concern. Enhanced tax incentives for R&D, especially for AI and cybersecurity initiatives, could potentially stimulate development in these fields.
The British Business Bank and National Wealth Fund should work synergistically with commercial banks to provide financing for businesses to expand, the IMF suggests. However, the government has been shifting priorities in areas like Net Zero and defense, often at the expense of other objectives.
The skills shortage is recognized, with Make UK, a UK engineers' representative group, welcoming a 10% increase in the apprenticeship budget. Nonetheless, the group noted that millions of pounds collected via the apprenticeship levy were not allocated as intended.
Health-related matters also play a significant role. The government hopes to encourage more of the 1 million individuals added to the welfare roll since Covid-19 to re-enter the workforce by restricting sickness benefits access. Improving health outcomes, however, proves challenging, particularly with the NHS facing poor performance and skyrocketing demands from workers.
Building prevention measures into the system, such as making obesity therapies more accessible, could be a proactive step.
Government bond prices have been affected by the so-called 'moron premium', shaken by political instability like that seen with Donald Trump and Liz Truss. Investors are becoming less tolerant of the risks associated with longer bonds, causing their value to plummet in many portfolios.
As a result, new management at the UK Debt Management Office is considering a shift from the 30-year bond issuance, shortening the average bond maturity from the historic 14-year average to 9 years. Similar measures are being implemented in the U.S. and Japan due to escalating investor concerns.
The excess global debt amounts to an estimated $80 trillion, posing a significant burden. Bank holdings of core government debt have not increased sufficiently to balance this burgeoning debt load.
Investing in R&D sectors such as AI and cybersecurity, supported by enhanced tax incentives, could potentially help alleviate the chronic under-investment issue in the UK's business sector. The Finance ministry could consider sustainable strategies for finance allocation, taking into account the multi-year public spending review, to better balance growth-stimulating proposals with budgetary constraints.
