The UK needs an economic boost about four times as great as that currently planned by the government in order to restart the economy most effectively, says a new IPPR briefing paper today.
Researchers calculate that £190 billion is needed to get the UK economy back on track – four times as much as the chancellor has committed so far, and a figure which broadly matches the ambition of US President Joe Biden’s new administration.
This UK stimulus should be devoted to supporting businesses, workers and households hardest hit by the pandemic, restoring public services and helping the growth of sustainable, “future-proof” industries and jobs, the think tank says.
Failure to deliver such a boost risks condemning the UK to a “stagnation trap” with about half the rate of economic recovery. It would mean lower business investment and leave unemployment at more than 10 per cent in spring next year – much higher than under the proposed IPPR stimulus.
What’s more, IPPR calculates that the widely-watched “debt to GDP” ratio – the total amount owed by the government, compared to the overall size of the economy – would be lower than under current spending plans. That’s because a faster recovery would mean the amount borrowed is ‘offset’ by relatively quicker economic growth, and would also generate higher tax revenues and so lower borrowing in future years.
The economic boost so far announced by the chancellor for the year from April (fiscal year 2021/22) is worth about 2 per cent of the value of the entire UK economy before the pandemic (2019)
A significantly more powerful boost (£190 billion), equivalent to 8.6 per cent of the value of the economy, would deliver a faster recovery, stimulate business investment to its pre-pandemic level and halve the number of job losses – without risk of causing high UK inflation
Such a boost would be similar in scale to the $1.9 trillion stimulus package planned by the new Biden administration, which is equivalent to 8.9 per cent of the value of the US economy
Planned boosts by other leading economies are also significantly greater than the UK, compared with their size: up to 13 per cent in Japan, between 3 and 4 per cent in Canada and 3.7 per cent in Germany (which includes the EU’s stimulus package)
Carsten Jung, IPPR senior economist and lead author of the report, said:
“The chancellor should use the budget to provide bold support for the economy and introduce measures that match the scale of the economic peril the UK faces.
“The Biden administration’s plan shows what is possible. And it highlights the scale of support needed to bring economies back to pre-crisis levels of activity, or else risk falling into a ‘stagnation trap’ – a situation of a sluggish recovery and permanently diminished growth. All in all, the risk of doing too little far outweighs the risk of doing too much. Joe Biden has understood this. Rishi Sunak should follow his lead.
“Many agree with the need for a significant boost, but worry that we cannot afford it. That profoundly misunderstands the financial situation we’re in. Eminent institutions including the International Monetary Fund (IMF) and the OECD now advocate a sizeable stimulus for economies like ours, financed by borrowing, as interest rates are so low and the scope to generate rapid growth is so large.”