An expanding pool of workers means the economy can grow faster than the government assumes without fuelling inflation, according to an influential think tank.

The study by Ernst & Young's ITEM Club says changes to the labour market, annual Blue Book revisions to gross domestic product and improved productivity mean the country's potential growth rate could be half a percentage point higher than policymakers think.

The government expects Britain's potential growth rate to dip next year to 2.5 percent from 2.75 percent, largely due to the effect of baby boomers retiring.

The ITEM Club, however, says it could be as high 3 percent, boosted by a continued influx of migrant workers and a growing number of older people remaining in the workforce.

The irony is that just as the Treasury is lowering its estimate of the trend rate of growth, the trend has actually gone up, said Peter Spencer, chief economic advisor to the ITEM Club.

Since European Union enlargement in 2004, Britain's pool of available workers has expanded by almost 800,000 and the number of people in employment has risen to record levels.


The potential growth rate is hard to measure but is key to both interest rate policy and Chancellor Gordon Brown's spending and borrowing plans.

Brown is already expected to use his pre budget report later this autumn to revise up his growth forecast for 2006 and Spencer said he would be astonished if he did not revise up his forecast for the potential growth rate at the same time.

If our assessment of growth and GDP is correct, everything points to a Brown Bonanza for the Treasury this autumn, he added.

In his March budget, Brown forecast growth of 2 to 2.5 percent this year. But the economy expanded at a 0.7 percent clip in each of the first two quarters and many forecasters, including the Bank of England and IMF, have already revised up their projections.

Current Treasury forecasts assume growth of 2.5 percent through to 2008 and the report suggests these forecasts may also need to be revised higher.

The significant improvement in the UK labour force and other factors that impact on the supply side of the economy has led to greater spare capacity in the UK, said Spencer. The UK economy has more room to grow than anyone thought.