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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
     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
     --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:
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