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Public sector investment needed to prevent Brexit downturn – IPPR

The government should increase public spending and abandon targets on achieving a surplus in order to avoid an economic crisis following the UK’s vote to leave the European Union, the Institute for Public Policy Research (IPPR) has said.

Today, Mark Carne, the governor of the Bank of England, is expected to announce a cut in interest rates from their historic low of 0.5% to 0.25% in order to encourage growth, after refusing to do so immediately following the referendum.

However, the IPPR said that the new chancellor, Philip Hammond, must also commit to removing public investment from deficit targets and set a longer time frame for reducing government debt.

Alfie Stirling, IPPR Research Fellow in economic policy, said: “At this stage, further cuts in interest rates can only get us so far before they fail to boost the economy at all and even start to cause harm. Relying on monetary policy alone to keep the economy on track after Brexit is like trying to stay afloat in a storm with one hand tied behind your back.

“The chancellor has already hinted he will ‘reset’ government spending policy – but he must be prepared to do this properly. It is not enough to wait for the economy to stall, and then simply borrow more to cover the costs of increased welfare and reduced tax receipts. We need to use government spending as a preventative measure, like interest rates, to keep the economy moving.”

The previous chancellor, George Osborne, said before leaving office that he would no longer support the target of returning government spending to a surplus by 2020.

The IPPR said that the Treasury should invest in increasing long-term productivity. It said that this could include treating spending on some areas of health, education and employment programmes as “a form of investment spending” if it can be proven to improve UK productivity.

The IPPR also suggested that the Treasury reviews the UK tax base and considers revising “inefficient” tax reliefs on areas such as buy-to-let mortgages.

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