BUSINESS AS USUAL
The government’s £16bn annual increase in current spending will put pressure on the Bank of England to raise interest rates in a bid to control inflation.
According to the OEF model, this would then lead to a 2% rise in the value of sterling. The subsequent impact on UK producers’ ability to compete, both in export markets and with imported goods in domestic markets, would mean that by 2004 investment would be 1.5% lower and manufacturing output 0.6% lower than they would otherwise have been.
An increase in government investment in areas such as training and transport of 1.5% is funded by an identical reduction in government procurement – day-to-day expenditure in areas such as health and social security.
As the rise in public sector investment encourages the private sector to invest more heavily, total investment would increase by approximately 1.8% of GDP. Potential output would gradually increase, raising GDP by an extra 0.5% a year by 2004, without pushing up inflation. Labour productivity would increase at a similar rate.
Private sector revival
Companies are encouraged to invest more themselves, by increasing capital allowances for plant and machinery to 100% in the first year.
This would cost the government around £10.5bn in the first year and around £2bn a year from then on, although the report says that this would only be a cashflow cost as allowances would simply be given earlier than at present. The resulting reduction in costs for companies would lead to an increase in investment of approximately 2.5%, while manufacturing output would be 0.5% higher.
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