Higher inflation and low growth might be with us for the foreseeable future….. not just for the next few months but for the next 10 years.
The Governor of the Bank of England – Mervyn King – admitted that he has been taken by surprise by the fact that inflation has risen from 1.1% in 2004 to 2.4% in August of this year. Figures due to be published next week are widely anticipated to show inflation standing at 2.7%. Well above the 2% official target. In the last 12 months growth has slowed to 1.5% which is its lowest rate for well over a decade.
In a recent report the OECD is forecasting UK growth of only 1.7% for 2005 and it gave a warning that up to £10bn of tax rises would be needed to fulfil spending promises without breaking the Chancellor’s golden rule on borrowing. This is the equivalent of 3p in the £ rise in income tax.
The Ernst & Young Item Club, which uses the Treasury's Economic Forecasting model, is forecasting growth at just 1.6% which is half the Chancellors prediction of 3% - 3.5%.
The OECD pointed out a number of weaknesses in the economy that will have long term consequences not least of which persistent low productivity without any sign of improvement. Britain remains stubbornly stuck behind France and America in terms of productivity (GDP) per hour worked.
They suggest a number of causes including; - poor skills of workers, poor education, poor transport infrastructure and a mediocre record on innovation including spending on research and new patents registered.
The report also highlights the large numbers of people on incapacity benefit, which is the highest among all 30 OECD countries for men aged between 25 and 54. There are 160,000 recipients under the age of 25.
In a speech on 11th October Mervyn King warned that the next decade was unlikely to be as kind to the UK at the last one.
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