Britain’s growth rate will bounce back above 1.5% next year as ministers exceed existing public spending budgets to cope with an ageing population, a leading thinktank has said.
The National Institute for Social & Economic Research (NIESR) said plans to ease austerity only slightly over the next five years were “unbelievable”. It added that government spending would almost certainly need to increase by more than expected in the next few years, increasing the UK’s GDP growth.
The thinktank said the need to borrow more or increase taxes to fund the extra spending to cover the health and social care of older people should spark a debate that goes beyond the planned comprehensive spending review of Whitehall budgets, due this summer, to include a comprehensive tax review.
Like most economic forecasters, NIESR said its predictions were based on a “soft” Brexit that maintained a high level of access for UK and EU businesses in each other’s markets. Under this scenario, the UK economy is expected to grow by 1.4% this year, 1.6% in 2020 and 1.9% in 2021.
The low level of GDP growth in relation to the population – GDP per capita – is expected to rise from 0.7% this year to 1.3% by 2021.
The NIESR’s director, Jagjit Chadha, said: “We expect public spending to rise more quickly than currently planned. That is likely to mean that the government’s medium-term fiscal objectives will not be met.”
Garry Young, a NIESR analyst, added that Whitehall spending forecasts could not be maintained at the low levels documented in the last budget.
Chadha’s comments appeared to contradict the chancellor, Philip Hammond’s, forecast at a hearing before a committee of MPs, when he said a clampdown on spending between now and the mid-2020s would allow future governments to choose between higher spending and reducing government debt.
Hammond told MPs on the Treasury select committee the government was on track to meet its future fiscal targets and there was significant headroom in his budget for flexibility on spending or tax decisions, even though Brexit was stalling longer-term planning.
Ministers have options, and that’s a “very good place to be”, said Hammond. However, he added that over the longer term: “We have to recognise that as the population ages, the pressure on public services and public spending will increase.”
He cited Brexit as one of the reasons business investment in Britain was significantly below what would normally be expected, depressing private sector growth.
“It’s pretty clear to me that the principal reason is uncertainty created by the continuing process of working out how we are going to exit from the European Union,” he said.
NIESR said there was mounting evidence the economy was adversely affected by Brexit-related uncertainty and further delays were making the situation worse. Business and consumers were displaying greater pessimism about the UK’s future prospects, it said.
The economy has already lost 2.5% of GDP growth since the summer of 2016 and this was growth “that would never be recovered”, it added.