Innovation vital says think tank amid warning of sluggish growth

The Ernst & Young Item Club is predicting sluggish growth for the next two years, with the UK economy “muddling through” to 2015 unless policymakers adopt a more innovative approach to fiscal and monetary policy. Professor Peter Spencer, chief economic advisor to the Item Club, said: “The UK has crawled out of recession but the Government’s mid-term report card should read ‘could do better’.

“Innovative policies from the Federal Reserve have helped to put the US economy in a stronger position to withstand tax increases and spending cuts.

“A fresh approach to monetary and fiscal policy in the UK could help open the door to long-term sustainable growth.”

Prof Spencer, of York University, said the package of infrastructure spending announced in the Autumn Statement had the potential to be a real game changer, but the £5bn investment did not go far enough and was a missed opportunity.

“There is scope for borrowing to help fund infrastructure investment,” added Prof Spencer “And the Government could certainly do more to encourage housing investment, which is subtracting from GDP when it should be adding to it.

“On monetary policy, the inflation target has now become a risk to the credibility of the Monetary Policy Committee and is long past its sell-by date.

“We are hopeful that the Treasury will see the arrival of a new Governor of the Bank of England as an opportunity to review the remit that it gives the MPC.”

The Bank of England could look at ways of easing small and medium-sized businesses’ access to the corporate bond market if it judged further stimulus was needed for the economy, the newest MPC member, Ian McCafferty, said on Friday.

According to the Item Club report, the UK’s short-term growth will be driven by improving prospects for the consumer, with falling inflation and rising employment levels boosting disposable incomes and helping to revive the high street.

But the Item Club warned that this will not provide the balanced, long-term, sustainable growth that the Treasury is hoping for.

Prof Spencer said: “Companies have been holding onto staff in the hope of an uptick in demand and there’s a real risk that the growth in employment could go into reverse if GDP continues to disappoint.

“Balanced growth is ultimately dependent on a revival of exports and business investment, but this will remain elusive until confidence is restored to the financial markets.”

Trade levels and business spending remain weak.

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