June 19, 2024

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Jeremy Hunt’s search for an elusive growth strategy

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In his Autumn Statement speech on Wednesday Jeremy Hunt, chancellor of the exchequer, stated that he proposed “110 growth measures — don’t worry, I’m not going to go through them all”. I am not going to go through them all either. Fortunately, the Office for Budget Responsibility has done so and come out sceptical: it has lowered its estimate of the medium-term potential rate of growth of the economy to 1.6 per cent, down from a previous estimate of 1.8 per cent, despite Hunt’s reforms. That is not because the measures are all bad. Some of them — notably permanent expensing of investment — are rather good. The problem is rather that it is hard to accelerate growth. No magic wands exist.

Being a good Conservative, the chancellor rejects “big government, high spending and high tax because we know that leads to less growth, not more”. Even this is not as obvious as he believes. According to the IMF, between 2010 and 2023, average real GDP per head rose by 20 per cent in Denmark. This is double the increase in the UK. Yet the average ratio of tax revenue to GDP in Denmark was 53 per cent against 37 per cent in the UK. In 2023, Denmark’s real GDP per head was close to a third higher than the UK’s: it is possible for a country to prosper with high taxes.

The first thing a government interested in raising the growth rate would try to do is raise the investment rate. This is particularly important for the UK, where investment in physical capital is very low by the standards of its peers. Between 2010 and 2023, the UK’s gross investment will average close to 17 per cent of GDP. That is below the rate in all other significant high-income countries. US gross investment averaged 21 per cent of GDP, for example.

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2023-11-26 08:10:19

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