Government’s economic reforms mark a good start on its stretching growth target, but leave much more to do

Government plans to boost infrastructure and build more homes could feasibly get Britain halfway towards having the strongest economic growth in the G7. But it will need to deliver these contentious reforms on the ground, and put growth at the forefront of other policy decisions on trade, skills and labour market reform, if it’s to turn its growth ambitions into reality, according to new Resolution Foundation research published today (Thursday).

The Growth Mindset examines what it would take to meet the Government’s ambition of securing the strongest economic growth in the G7, and quantifies the potential GDP impact of some of the policies it has announced so far.

The Foundation says that moving from the UK’s current poor economic position – in which a 5 per cent productivity gap has emerged between the UK and the rest of the G7 since 2007 – towards having the strongest growth in the G7 by the end of the Parliament is a stretching target.

The UK would need to raise its GDP-per-capita growth from 1 per cent (the IMF’s current forecast) to 1.5 per cent (the IMF’s current forecast for the US) to meet it. Even 1 per cent growth would be a big turnaround from the 0.1 per cent annual falls over the past five years. But while 1.5 per cent is even tougher, it would still be significantly weaker than levels the UK experienced in the decade running up to the financial crisis (2.2 per cent).

Turning to growth policies already announced, the report says the Government has made a number of positive moves to boost infrastructure spending. Direct investment is coming via the creation of the Green Prosperity Fund and Great British Energy, while the new National Wealth Fund should encourage private investment in green infrastructure.

If these new bodies make efficient use of the extra infrastructure spending they’re overseeing, it could feasibly boost annual GDP-per-capita growth by 0.2 percentage points over the next decade. An even bolder investment strategy could really shift the dial on growth, says the Foundation.

The Government has also announced an ambitious target of building an additional 1.5 million homes over the parliament. While getting near this target is a huge challenge, doing so would significantly boost growth. The report notes that every 60,000 additional homes built raises GDP-per-capita by 0.06 per cent a year (though the impact on the public finances is smaller as the additional GDP generated from housing services isn’t captured in higher tax receipts).

If the growth impact is to be maximised, however, more homes are needed in high productivity areas, as well as major cities where there is untapped growth potential. This would allow workers to access housing in areas with high-productivity jobs, and encourage firms to co-locate in high productivity clusters.

The Foundation cautions that the Government’s new mandatory housing targets are actually more focused on small areas, towns and villages (where the housing stock is due to rise by 1.4 per cent) than ,major cities (such as Manchester and Birmingham, where the housing stock is due to rise by 1.2 per cent). Reorienting the targets towards highly productivity areas and cities could feasibly boost annual growth by up to 0.14 per cent.

As well as successfully implementing its existing agenda, the Foundation says that there are other policy areas the Government should look to in its quest for growth.

One key route lies in resetting trade relations with the EU, and reducing some of the post-Brexit trade frictions that have led to the UK’s goods trade falling by 10.6 per cent compared with pre-Brexit levels, in contrast to growth of 4.6 per cent across the rest of the G7.

The Government’s current proposals – such as the mutual recognition of professional qualifications – are unlikely to have a significant effect on GDP. Instead, a much more ambitious plan on broad regulatory alignment with the EU across the economy could boost GDP-per-capita by 0.6 per cent.

Finally, the Foundation says that reforms to public investment, pension funds and skills each have the potential to raise growth – so they must be ambitious and well designed – while labour market reforms must be carefully implemented so as to not impede worker mobility. The Government needs to use the forthcoming Budget and Spending Review to move from a few promising growth policies to a comprehensive strategy for the next decade and beyond.

Emily Fry, Senior Economist at the Resolution Foundation, said:

“The new Government’s focus on boosting growth is badly needed as the UK’s long-term economic malaise has left us falling behind our peers, and caused living standards to stagnate.

“Early commitments on infrastructure spending, planning reform and housebuilding each have the potential to boost growth – if they get the detail and delivery right.

“But the Government will need to be even more ambitious in other areas – from resetting relations with the EU to getting its labour market reforms right, and stepping up investment – if it wants Britain to enjoy the strongest growth in the G7.”