Higher government spending and an ageing population are among the factors that will render the sustainable growth rate far lower than the 2.5% the Treasury thought typical between the 1980s and 2000s, according to the Institute of Economic Affairs (IEA).
Its assertions, published in a discussion paper entitled ‘Will flat-lining become normal?’, play down recent upbeat news on the economy, culminating in the OECD lifting its 2013 growth forecast for the UK to 1.5% and Chancellor George Osborne declaring this week it had “turned a corner”.
But economists writing in the IEA paper said the UK is more likely heading for an era of sluggish growth, pointing out that, five years on from the start of the financial crisis in 2008, GDP is still 3% below its peak. “That is unprecedented in 170 years of shocks that have hit the UK economy since industrialisation,” said the paper.
“Until 2008, the UK had got used to our economy doubling in size every 25 years: unless action is taken it will now only double in size every 70 years,” says the group of economists, which includes former Treasury adviser and UK Independence Party candidate Tim Congdon.
IEA editorial director Philip Booth said: “People shouldn’t get too excited about better growth figures and recent forecasts from groups such as the OECD. We still have a long way to go before we recover the loss of output from the 2008 crash.
“Furthermore, the medium-term prospects for growth do not look healthy unless the government determinedly reduces government spending and regulation.”