MNI POLICY: NIESR Says Aim of Doubling UK Growth Unrealistic

-NIESR Sees GDP 2020 Growth At 1.3%, 1.6% in 2021; Dismissive of Chancellor

Javid's 2.75% Goal 

-NIESR Says Proposed Fiscal Rules Arbitrary, Too Tight

By David Robinson

     LONDON (MNI) - The National Institute of Economic and Social Research said

Chancellor of the Exchequer Sajid Javid's aim of returning growth to its post

war average of 2.75% per annum was unrealistic with the institute's updated

forecasts showing UK growth at 1.3% in 2019 and 2020 before edging up to 1.6% in

2021.

     Draft fiscal rules set out in the ruling Conservative Party manifesto were

arbitrary and appeared to be too tight to allow for any transformative boost,

NIESR said. With little supply capacity left, it warned that injecting more

substantial fiscal stimulus would run the risks of pushing the Bank of England

to tighten monetary policy and of crowding out private sector investment.

     Following are key points from NIESR's quarterly forecast round and

analysis:

     --Key projections show UK growth edging up from 1.3% in 2020 to 1.6% in

2021 and 2022, with inflation rising from 1.8% this year to 2.1% in 2021 before

dipping to 2.0% in 2022, in line with the target set for the Bank of England

Monetary Policy Committee.

     The BOE cut its estimate of potential supply growth to just 1.0% in its

annual assessment last month. NIESR made no comparable assessment of potential

supply side growth but its projections of a near-term pick up in inflation, with

growth only rising towards 0.4% a quarter, suggested little discrepancy between

its and the BOE's views.

     Javid's desire to get growth back up to 2.75% after the UK leaves the

European Union was "quite unrealistic," NIESR's Arno Hantzsche said, with the

institute putting a one-in-four chance on growth hitting this level within in

its forecast horizon.

     --NIESR was sharply critical of the draft fiscal rules that were set out in

the Conservative Party's election manifesto and that are expected to be formally

unveiled in the March 11 Budget.

     The three rules stipulate that public investment, currently running at

around 2% of GDP, should not rise above 3%, that the current budget should move

into balance on a three-year rolling basis and that debt interest payments

should stay below 6% of revenue. The rules are "too constraining" to deliver a

transformative fiscal boost and lack any clear theoretical foundation, NIESR

said, calling for them to be ditched.

     Among the rules' flaws are that debt interest payments are hard to

forecast, as they depend on many things including gilt yields, shifts in Bank

Rate and whether quantitative easing is unwound or extended. Also, the divergent

goals of balancing the current budget and increasing investment spending are

hard to square without tax rises. Building a new hospital, for example, would

also require higher current spending to pay for the hospital staff.

     NIESR advocated focussing instead on public sector net wealth.

     --NIESR forecast that net borrowing would gradually rise from 2.2% of GDP

in 2019 to 2.9% in 2022, with net debt, flattered by repayments of the BOE's

Term Funding Scheme, dipping from 80.8% of GDP in 2019 to a low of 77.3% in 2021

before rising back up to 78.5% in 2022.

     Its central forecast was for the MPC to cut Bank Rate once in 2020, taking

it to 0.5% from 0.75% before reversing the hike in 2022.

--MNI London Bureau; tel: +44 203-586-2223; email: david.robinson@marketnews.com

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