Labour has said it will set the Bank of England a new 3 per cent target for productivity growth but refused to specify when this should be achieved.
John McDonnell, shadow chancellor, will on Wednesday launch Labour’s final report on the UK’s financial system.
Written by Graham Turner, an economist at GFC Economics, the report will make a series of recommendations, including that the BoE should move to Birmingham.
But its most eye-catching proposal is that the central bank should target productivity “to better help drive economic growth”. The bank’s mandate would be expanded to include a 3 per cent productivity growth target.
“The Bank of England and government should sign an accord at the start of the next government, detailing how each will work towards achieving this 3 per cent target,” the party said. “The Bank of England will be required to report, after each Budget, on the government’s plans in light of this 3 per cent target.”
However, the party was unable to explain whether the target would cover a period of months or years or even decades. “It is open for consultation,” it said.
The report, called Financing Investment, highlights Britain’s poor rate of productivity growth and emphasises the low level of investment into manufacturing, ICT and other critical sectors.
Its other recommendations, some of which have been previously announced, include setting up a Strategic Investment Board; using RBS, the publicly-owned bank, to deliver more lending to small companies; and establishing an applied sciences investment fund to deliver state funding to research and development.
Raising productivity growth is a key aim of all political parties because increasing each worker’s output would help raise the national growth rate, increase incomes and bring more tax revenues into the Treasury.
Productivity growth has never exceeded 3 per cent a year in Britain. Over the past decade it has increased by just 0.2 per cent a year.
Last November, the Office for Budget Responsibility calculated a “strong productivity” scenario in which Britain’s public finances would move into surplus by 2022 if annual productivity growth improved to 2 per cent a year by the early 2020s.
In the same month, Philip Hammond, chancellor, admitted in the Budget that productivity growth had been “stubbornly flat” for years.
However, one of the few aspects all the BoE’s policymakers agree on is that central banks only have the ability to smooth booms and busts in the economy, and have no power over the underlying productivity growth rate.
The BoE estimates the likely growth of productivity and sets interest rates on that basis.
Last autumn, Mark Carney, BoE governor, criticised those who wanted the central bank to solve problems such as productivity. The BoE “cannot deliver lasting prosperity and it cannot solve broader societal challenges,” he said, adding that calls for it to solve poor UK productivity “confuse independence with omnipotence”.
The BoE refused to comment.
Simon Clarke, a Tory MP, said: “Labour’s refusal to put a timeframe on their target shows their attempt to meddle with the Bank of England’s independence is already unravelling.”