Press Story

Ahead of his Autumn Statement next Tuesday, IPPR is recommending 10 ideas to boost economic growth.

Against the background of the anticipated revising down by the OBR of its growth forecasts for 2011 and 2012, IPPR argues that the pace of deficit reduction needs to be varied depending on the strength of the economy. But IPPR also says that spending cuts and tax reforms are needed in the medium term to secure fiscal discipline.

Nick Pearce, IPPR Director, said:

"The Government needs to be pragmatic in the face of troubling economic headwinds blowing towards Britain from the Eurozone. The Chancellor should resist the siren voices calling for the abolition of employment rights and instead focus short-term investment into areas that support longer-term growth. The plan for growth should aim to increase demand in 2012 but also deal with the long-term structural weaknesses in the British economy that are holding us back."

IPPR argues the Chancellor should beef-up the Green Deal, establish a National Investment Bank, expand the Export Credit Guarantee Scheme, extend free childcare places, increase investment in skills and create Innovation Zones to tackle the economy's long-term and structural weaknesses and build on the UK's economic strengths.

IPPR's ten ideas to boost growth are:

Make the pace of fiscal tightening responsive to growth in the economy: When growth is strong, tightening can be speeded up but when growth is weak, as now, then tightening should be slowed down.
Guarantee the long-term young unemployed a job by injecting up to £2 billion into the Green Deal: Extra funds for the Green Deal could be used to take the scheme to scale by subsidising charges for installing energy efficiency measures and to subsidise the employment of young, long-term unemployed people. The Government should also introduce a job guarantee scheme for anyone who has been out of work for more than 12 consecutive months, matched by an obligation to take up the offer.
Introduce tax reforms to promote private sector growth and employment creation: The Chancellor should introduce capital allowances for future spending on infrastructure projects and extend the R&D tax credit to all non-profitable companies. He should also reverse his plans to cut capital allowance rates.
Announce an immediate £5 billion increase in infrastructure spending, rising to £10 billion in 2012/13: There is scope for the Chancellor to announce an immediate increase in infrastructure spending - in areas such as social housing and transport - of £5 billion for 2011/12. This should be increased to £10 billion in 2012/13 and subsequent years.
Move quickly to implement 'credit easing' and to establish a National Investment Bank: The Treasury should encourage banks to securitise (bundle up) small company loans and overdrafts that could then be bought as part of the credit easing programme. It should also aim to have a National Investment Bank operational by April 2013.
Create sector-specific 'innovation zones': The Government should create 'innovation zones' that would offer greater government support for R&D and start-ups in key, high value-added sectors. Within the zones, businesses, private stakeholders, researchers, local community groups and councils would work together to identify barriers to growth and to break them down.
Expand the Export Credit Guarantee Scheme: The Government should expand the Export Credit Guarantee Scheme. Efforts should focus in particular on encouraging small and medium-sized businesses across a range of industries to make use of the scheme. The ECGD's mandate should be broadened to include advising businesses on the credit-worthiness of overseas buyers and assisting exporters to recover bad debts.
Ensure industries can recruit the skilled workers they need to expand and to lift productivity levels: The Growth and Innovation Fund should take centre-stage in the Government's skills policy. A much expanded fund - £200 million a year - should be backed up by an ambitious programme of research, pilot projects and learning networks to inspire innovative ideas and practice across the economy.
Extend free childcare to make it easier for parents to return to work: The Government should reverse its decision to reduce support through the childcare element of the Working Tax Credit. Forthcoming IPPR analysis shows that free childcare pays for itself. The Government should take steps towards a system of universal childcare to increase maternal employment rates.
Back universities' attempts to attract overseas students and businesses' need for skilled migrants: The Government should reverse its clampdown on students and skilled migrants from outside the EU. The economy cannot be 'open for business' but closed to those who want to study and do business here.

Notes to Editors:

IPPR's new report - '10 ways to promote growth' - is available in advance from the IPPR press office and will be available to download from http://bit.ly/IPPR8266

IPPR's new report - 'State of the UK economy' - is available in advance from the IPPR press office and will be available to download from http://bit.ly/IPPR8255

IPPR's research shows that the recovery from the recent recession is shaping up to be the slowest on record. Real GDP growth has disappointed over the last year. On 29 November, the OBR will be revising down its forecasts for growth in 2011 and 2012. Even if its forecasts for later years remain unchanged, they will be for only moderate growth, despite being based on optimistic assumptions about exports, investment and households' willingness to take on more debt.

IPPR argues that a balance needs to be struck between efforts to rebalance the economy and the need for higher growth of any sort in the short-term to get the economy back to full employment. Manufacturing can play a part in the economic recovery, but its share of economic activity has shrunk to the point where it cannot alone drive growth. The UK needs to exploit its other strengths, in areas such as the creative industries, education, and even finance.

IPPR analysis shows that economic performance in the UK has been hampered by a number of supply-side weaknesses: on innovation, investment in physical capital and skills. Productivity levels remain lower than in many of our competitors. These weaknesses have been known about for some time but policies to tackle them have not been effective. Government needs to develop better methods, for example looking at a state investment bank to boost levels of infrastructure spending.

IPPR's previously published report - 'Deficit Reduction Averaging' - is available from http://www.ippr.org.uk/publicationsandreports/publication.asp?id=809

IPPR believes the deficit should be reduced more slowly than in the Chancellor's plan - so that cyclically-adjusted net borrowing is eliminated by 2017-18. IPPR wants a threshold for investment spending so that it does not fall below 2 per cent of GDP.

IPPR's deficit reduction averaging plan, has five key implications for economic management:

The cyclically-adjusted PSNB will be zero in 2017/18 - on current projections, this will require a 7.6 per cent cut in the cyclically-adjusted PSNB over seven years from its 2010/11 level.
From 2010/11, the cyclically-adjusted PSNB will be reduced by 1.1 per cent of GDP each year on average to achieve the overall 7.6 per cent cut.
In any year, this 1.1 per cent target will be reduced if, in the judgment of the OBR, the fulfilment of such a target would lead to an annual growth rate below 1.5 per cent. Conversely, it will be increased if growth is expected to be above 3 per cent.
In each year, subject to a satisfactory outlook for growth, the annual average target reduction will be reappraised based on the latest actual data, so that the plan stays on course to hit the 2017/18 cyclically-adjusted PSNB target of zero.
If the 2017/18 cyclically-adjusted PSNB target of zero cannot be met without reducing annual GDP growth below 1.5 per cent, then the total length of the deficit reduction programme may be extended.

By allowing a slower pace of deficit reduction in the next few years, the averaging approach would raise the prospects for growth in later years and so reduce the likelihood of the target of a zero PSNB in 2017/18 being missed than would otherwise be the case.

Contacts

Richard Darlington, 07525 481 602, r.darlington@ippr.org

Tim Finch, 07595 920899, t.finch@ippr.org