Boost investment or miss chance to make the most of Brexit, Government urged
If politicians focus too much on Brexit, they risk missing the big underlying problems in the economy, according to NIESR Credit: AFP
10 May 2017 • 12:01am
Investment has to rise to boost the economy, raise productivity and capitalise on the export opportunities given by the Brexit vote, economists have told politicians ahead of the general election.
Public and private investment has been disappointingly low for years, and the situation has been particularly severe since the financial crisis.
This is dragging down productivity and analysts at the National Institute for Economic and Social Research (NIESR) believe the next government should prioritise improving investment levels.
"There is very little investment growth despite interest rates that really would cause us to have expectations of quite phenomenal levels of investment growth," said Jagjit Chadha, NIESR's director.
"Key in the middle of all of this is infrastructure, is investment [policies] to augment the capital stock. It is stunning to me to see the UK's expenditure on research and development (R&D) ... at under 2pc of GDP for 25 years. The G7 average has gone towards 2.5pc. This is a level of underperformance."
Mr Chadha fears that the election campaign will focus on the short-term issue of each political party's Brexit negotiating plans, rather than the underlying issues which are blighting the UK economy.
"We are in danger of letting the urgent drive out the important," he warned.
The economist said the Government should prioritise thoughtful public investment - building infrastructure where it is most useful to the private sector - as well as encouraging investment in physical stock and R&D in the private sector.
"I am attracted to the idea of R&D expenditure - the research that I've looked at seems to suggest public encouragement of R&D tends to lead to private R&D - you can think of university clusters and networks, where those can go hand in hand to develop a better capacity in the economy," said Mr Chadha.
He believes these steps are crucial to boosting productivity which is key to long-term living standards and wages.
Mapped - UK regional productivity
The director said that there are problems in the banking system which should be addressed as well, as lenders are not good enough at providing funds to new companies and entrepreneurs, and focus too much on serving existing customers - even if those are not a good source of economic growth.
His colleague, Simon Kirby, added that investment in manufacturing is needed urgently - the sector is benefiting from the fall in the pound since the Brexit vote, but needs more capacity to meet the extra demand from foreign customers.
"We do need to bear in mind at the moment the manufacturing sector is at about or above capacity, so there are questions about how much export demand that sector can meet, which implies further investment," said Mr Kirby.
"But if uncertainty does pick up as a consequence of our vote to leave, given we don't know what the future trading relationships may be, that may weigh on that sector's ability to expand."
NIESR predicts that the economy will grow by 1.7pc this year and 1.9pc in 2018, meaning the UK is expanding more quickly than the eurozone but not as rapidly as the US, which is forecast to grow by 2.1pc and 2.3pc in the same periods.