Chancellor's spending spree will only have 'modest' impact on growth

Oscar Williams-Grut
Senior City Correspondent, Yahoo Finance UK
Britain's Chancellor of the Exchequer Sajid Javid leaves number 11 Downing Street in central London on January 29, 2020. Photo: DANIEL LEAL-OLIVAS/AFP via Getty Images

The government’s planned spending spree will only have a “modest” effect on UK growth, according to a leading independent research institute.

The National Institute of Economic and Social Research (NIESR) said on Thursday that it expects UK GDP to grow by just 1.5% this year and next, unchanged from 2019’s growth rates.

The forecast comes despite plans to spend billions of public money on “levelling up regions” in a bid to boost growth.

READ MORE: UK chancellor unveils spending spree at fastest rate in 15 years despite Brexit

Chancellor Sajid Javid is set to deliver the new government’s first budget in March and is expected to announced billions of pounds of new investment in infrastructure and skills training. Javid told the Financial Times last month he wants the spending spree to boost growth to between 2.7% and 2.8% per year.

However, NIESR said: “Additional public investment of up to around £20 billion per year is unlikely to have more than a modest impact on productivity and is not expected to offset the negative effect of Brexit.”

Garry Young, director of macroeconomic modelling and forecasting at NIESR, said boosting productivity would be key to reaching Javid’s targeted GDP growth.

“Attempting to raise overall growth to around 2¾ per cent a year at the same time as levelling up the regions will require significant improvements in productivity throughout the economy, especially where productivity has hitherto been lagging,” Young said.

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NIESR is Britain’s oldest independent economic research institute and its work is widely read by top financial decision makers around the world.

As well as Brexit trade negotiations weighing on the economy, NIESR said UK GDP growth would be held by weakness in the global economy. The institute forecast global growth of just 3% this year, remaining at its lowest level since 2009. NIESR expects global growth will pick up in 2021, rising slightly to 3.25%.