Kwarteng will struggle to hit his economic growth target, say experts

Kwasi Kwarteng told Treasury staff this week their focus should ‘entirely be on growth’ © FT montage; Bloomberg/Dreamstime

Chancellor Kwasi Kwarteng will struggle to hit his target of boosting annual UK economic growth to 2.5 per cent, experts have warned, saying that he has few available means to achieve this goal.

Ahead of a mini-Budget next week, in which Kwarteng will give details on how he intends to hit the 2.5 per cent target, economists said more growth was highly desirable but extremely difficult to accomplish.

They added that flagship plans by new prime minister Liz Truss to boost the economy — capping soaring energy bills as well as cutting national insurance and reversing a planned corporation tax rise — might raise economic performance in the short term but there was not much long-term benefit.

UK average annual growth rates have roughly halved since the 1960s, from about 3.5 per cent a year to less than 2 per cent, under governments of all political persuasions that sought to raise output.

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Line chart of Average annual growth in UK GDP (%) showing Average medium term UK growth has halved over the last 60 years

Productivity, measured by output per hour worked, grew by about 2 per cent a year from the early 1990s but has barely increased since the 2008-09 financial crisis.

But Truss said during the Conservative leadership contest that Britain “should be growing on average at 2.5 per cent”, and this has now become the Treasury’s overarching economic goal.

Kwarteng told Treasury staff this week their focus should “entirely be on growth”, and they should work more closely with other Whitehall departments to secure the goal, with the City of London playing a key part.

Kwarteng has criticised “the same old economic managerialism” of UK economic institutions — including the Treasury, the Bank of England and the Office for Budget Responsibility — but economists were sceptical that setting a growth target was likely to help.

Jagjit Chadha, director of the National Institute of Economic and Social Research, a think-tank, said that UK growth had been at the 2.5 per cent level only during the period of reconstruction after the second world war and amid deregulation in the 1980s.

“It’s hard to understand what tools we have to bring about a quick response in growth from the supply side now,” he added.

Giles Wilkes, senior fellow at the Institute for Government, another think-tank, said many of the obvious policies to foster fast growth were already in place.

“We already have £4.5tn of capital invested in this country, we are reforming skills, increasing the numbers in higher education, boosting research and development and we are not a corrupt country,” he added.

Line chart of  showing UK productivity growth stalled after the financial crisis

The policies available to the government to raise growth rates were often ruled out on political grounds, said Paul Johnson, director of the Institute for Fiscal Studies think-tank.

“Not abandoning planning reforms, not cutting education spending, not making trade with the EU harder and not cutting investment would help, but [the government] has decided to do these things,” he added.

“With borrowing, you can make growth happen in the short run, but that leads to a bad hangover.”

The expected measures in Kwarteng’s mini-Budget will result in a large amount of additional public borrowing this year and next.

The estimated cost of holding down gas and electricity bills is close to £150bn, while the tax cuts cost £30bn a year. The Treasury is also budgeting more than £20bn a year for additional debt servicing costs.

Ministers have committed to disclose how much extra debt the government will be issuing in a new gilt financing remit alongside the mini-Budget.

Labour suspects Kwarteng could go further by cutting income tax bills, funded by even more borrowing, although neither Truss nor the chancellor have publicly said this is their intention.

One option would be to end the four-year freeze on the income tax personal allowance, currently £12,570, and the 40 per cent higher rate threshold of £50,270.

Some economists said if these measures boosted growth beyond the short term, the benefits would be substantial.

Professor Jonathan Portes of King’s College London said the UK would be “better off with higher wages and better public services”, but added that setting a growth target “achieves precisely nothing” unless the government had the policies to deliver it.

A further complication for Kwarteng and his efforts to focus the Treasury on growth is that staff are concerned about his sacking of Sir Tom Scholar, the permanent secretary, according to insiders at the department.

Lord Theodore Agnew, a former Cabinet Office efficiency minister, wrote in The Times that the removal of Scholar should be “a cause for celebration”, citing “the malign influence of the Treasury orthodoxy at play”.

But John Glen, former City minister, said: “Tom Scholar was, is and always will be an exemplary public servant of the highest calibre in the best traditions of his profession.”

Senior civil servants who are potential contenders to succeed Scholar include Tamara Finkelstein at the environment department, James Bowler at the trade department and Antonia Romeo at the justice department.

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