The Chancellor can’t take credit for all of the recoveryby Bronwen Maddox / March 21, 2014 / Leave a comment
The praise that the Chancellor won for this Budget was deserved
With just over a year until the general election, and some kind of recovery under way, one question hangs over the Chancellor’s performance: was he right in the course he set four years ago, or just lucky that the economic tide has turned? “Mainly right—but could have been much more so,” is the best answer to the first. Certainly lucky, should be the answer to the second.
But he is a long way from reaping political rewards for either. YouGov polls show the Conservatives trailing Labour by four to eight points, and only 38 per cent give the government credit for the recovery. The government still lacks a good response to the economic puzzles of the past six years: the stubbornly unchanging level of productivity, the consequent failure of wages to rise, and in turn, the squeeze on living standards. It has also failed to answer the bigger questions confronting Britain and other developed economies: how to tell the country that it cannot afford pensions as generous as in the past, how to boost savings, and what it should or could do about inequality.
Looking back over four years, the Chancellor has been less austere than his rhetoric or public image. Figures released at the autumn statement showed that public sector spending (before inflation) has actually risen, and is projected to rise further, from £717.8bn in 2013-14 to £730.5bn in 2014-15, reaching £778.7 in 2018-19, although many of the cuts, such as to social security, have yet to bite. But the conjunction of his policies with the collapse in bank credit after 2008 arguably prolonged the recession. He was right to make a priority of bringing down the deficit (which will, on current forecasts, not be eliminated until 2018-19, three years beyond his target). The missed chance was not to spend more on infrastructure—indeed, not to agree what that spending should be. The government’s indecision on where to put new airport capacity, power stations, what to do with rail travel, or with an east London crossing of the Thames, is one of its greatest failures.
Banks and finance houses are scathing; the money is now there, they say, helped by the Bank of England’s quantitative easing, which fed £375bn into the economy. But the capacity to push through political decisions is not, and amounts to a real handicap for Britain. Economics does not lend itself well to counterfactuals, but there are good arguments that growth would now be higher (although the deficit would also be higher) had that spending taken place. The Chancellor’s own counterfactual was that, if borrowing had not been reduced, then UK interest rates would have risen sharply, as they did in the most troubled parts of the eurozone.
But while he has a point—too quickly dismissed by Labour—it was somewhat overstated at the time and is less convincing now.
The Chancellor has also clearly been lucky in the growth that has come through. He proclaimed in the Budget that growth was the fastest in the developed world, also citing the rise in the number of those in work. The Office for Budget Responsibility (OBR), in its latest projections, reckons that the UK economy may grow by 2.7 per cent in 2014.Meanwhile, unemployment dipped below 7 per cent in January, and the number claiming jobseekers’ allowance fell by 3.5 per cent in the year to February; more people are working than ever before, even though the public sector is employing fewer.
Where is the luck? Well, Mario Draghi’s actions, as president of the European Central Bank, helped stabilise the eurozone crisis more than, in a sense, they should have done, given that Germans have hardly accepted the future burden which their rescue of southern Europe implies. What is more, the OBR, in its Budget day report, warned that the growth that is coming through appears to be “largely cyclical”—the recovery that would be expected at this point, but not one that reflects an ability of the economy to produce more than it did in the past.
It cites two causes for concern. The jump in household spending, which has driven growth, reflects lower savings rather than an increase in income. And “productivity growth remains exceptionally weak”—one reason why wages are stubbornly failing to rise faster than inflation. The OBR is rightly cautious about the reliability of productivity figures, a point echoed by Jim O’Neill, former Chief Economist of Goldman Sachs, in a Prospect roundtable the day before the Budget (listen to it here). But the apparent weakness of British productivity is one of the mysteries that lingers after the recession.
The recovery is generating a lot of comment about how the nature of work has changed since 2008—such as people taking several part-time or informal jobs—much of it thoughtful but most based on anecdote. There are not, though, clear answers yet.
The OBR may be right that this is the year when wages do outstrip inflation (it projects a 2.5 per cent jump in average earnings, against 1.9 per cent inflation). If they don’t, however, there is little chance that household spending can keep going. The ability of the economy to keep growing may then be more limited than the 2014 projections imply. Wages, living standards and inequality will continue to be the frontline of politics.
The praise that the Chancellor won for this Budget was deserved. He was right to maintain the deficit targets. The reform of pensions was an important step towards badly needed change, if it was also a nod to older voters, whom the government has continued to protect too much. The new incentives for savers are welcome. The changes to income tax are a useful though not dramatic contribution towards the living standards problem. But most of these steps could have been taken earlier. There was little attempt to address the blocks on new infrastructure. Nor was there progress on the mess of housing taxes and constraints on building. There are many warnings that Britain has not changed enough, in the kind of businesses it creates and jobs it generates, to allow it easily to escape from the predicament it is still in.