In an unabashed pitch to "the working people of Britain" at the Conservative Party Conference, George Osborne claimed "we are the builders" and peppered his speech with references to ways in which his party was building the economic security in the country from which working people and businesses would benefit. He certainly didn’t disappoint expectations that he would try and plant a flag in the political centre, which the Conservatives think has now been vacated by Labour, and in which they maintain many Labour voters are stranded.
Stripped of its political pitches and biases, what did we learn from the Chancellor’s speech about what the government is thinking with regard to its economic strategy?
Leaving aside the sale of shares in Lloyds Bank, there were two new things that haven’t figured strongly or at all in the government’s economic cupboard until now. The most important was the raid behind enemy lines to announce the establishment of an independent National Infrastructure Commission, headed by Gordon Brown’s former Transport Secretary, Lord Adonis, who will no longer take the whip in the House of Lords, but hasn’t renounced his Labour Party membership. A report will be prepared at the beginning of each Parliament to help identity and press the implementation of projects. It is expected that Lord Adonis will make a bee-line, amongst other things, for east-west rail links in the north of England (HS3) that support the Chancellor’s Northern Powerhouse strategy, as well as a north-south Crossrail2 across London.
Osborne said the Brits are rubbish at doing infrastructure, and he thinks the NIC will make a material difference. If it does, then the other major question is how new projects will be financed. Previous ideas to get pension funds to pool up to £20bn haven’t worked, partly, says the pension fund industry, because of the extra capital they would have to hold when they invest in infrastructure under Solvency II regulations. This hasn’t stopped Canadian pension funds from investing in UK infrastructure, or Australian pension funds from building up a considerable infrastructure portfolio in their own domestic business.
Osborne wants to pool 89 local authority pension funds into six British wealth funds, each with roughly £25bn in assets, and hope they will provide part of the answer to funding. We shall have to wait and see, but ultimately, the government should be ready and willing to backstop if necessary.
The nerdy bit of the Chancellor’s speech that was also new was what we call in the trade "fiscal federalism." This is basically a fancy word for giving local authorities more powers, and the right to keep and raise revenues for local purposes. He is proposing that local governments should be able to keep the business rates they collect, estimated at around £26bn, and also that uniform business rates be abolished, allowing local authorities to levy as they wish.
Critics have already charged that tax competition between local authorities will lower rates for businesses and force them to economise on local services, thereby creating a stronger bifurcation between more and less prosperous regions. This is what the existing revenue support grant is designed to mitigate, and so we will have to see if the government also plans to retain any kind of redistributive mechanism. But the scheme is entirely in keeping with the government’s philosophy to devolve some decision-making away from London, at least as far as finance is concerned, and with its belief that some competition will spur development in less prosperous regions. He may even have been persuaded about this on his recent trip to China, where there is widespread fiscal competition between provinces.
Much of the rest of Osborne’s speech was as we have heard before with a repeated emphasis on transforming the UK from a low wage/high welfare economy to one of higher wages/lower welfare in which tax rates come down. Doubtless stung by the controversy over the cuts to in-work tax credits as part of the £12bn in welfare savings, the Chancellor is adamant that in the round, ie taking account of all changes to personal financial circumstances, most people would be better off. Aside from the Labour Party, think tanks and even The Sun have weighed in against the curbs, which the Chancellor and the Prime Minister seem unwilling to withdraw. That said, it would be surprising if the Chancellor did not find something to offer by way of relief or compensation in the Autumn Statement later this year.
Inevitably, the Chancellor also re-affirmed the government’s fiscal responsibility credentials when it comes to the deficit, and the need to strive for a surplus in feast times as a cushion for the famine years. According to the OBR, the Chancellor will take £17.9bn in real terms out of public services between now and 2019-20, and £12bn out of social security. So, no change there then. I suspect the government will not buckle until much later in this parliament when circumstances will doubtless change. If the economy is still growing satisfactorily, the government will have goodies to distribute. If it isn’t, it will have to allow the existing plans to slip. Either way, proximity to the election will be a time for "softness".
One boast the Chancellor can make though is that he has wrong-footed his sternest critics, on the economic (not political) consequences of austerity. Some of the latter now sit on the Labour Party’s new economic advisory committee, and are on record as asserting over several years that the Chancellor’s economic strategy would be corrosive of economic growth and jobs, and self-defeating. One prominent participant insisted in an interview as recently as 2013 that "there is no evidence that you’re going to see any growth at all by 2015." This view is both tired and wrong.
Revisions to economic statistics by the Office of National Statistics last week, confirmed precisely the opposite. The recovery has, if anything, been slightly faster and stronger. Indeed, the UK, with front-loaded austerity, has performed roughly on a par with the US, which did not go this route. And this, in spite of the shrinkage in the UK’s over-sized financial services sector and the decline in North Sea oil output and prices. The UK is growing at about 2.5 per cent, give or take, and it is not down to credit growth as John McDonnell was wrongly advised to say last week. We are certainly not shielded from a future recession, but the recovery argument is over.
