From the TUC

What does the Budget tell us about the Chancellor’s economic approach?

21 Mar 2013, by in Economics

Yesterday’s Budget made clear that the Chancellor will not be changing course. Growth continues to disappoint, borrowing goes up, real wages fall and the Government continues to propose more of the same – apparently of the view that it has no scope at all to prevent ongoing economic stagnation.

So, what else have we learnt?

Firstly, whatever the Business Secretary may think, there will be no stimulus. The Chancellor paid lip service to the need to boost capital budgets, but £3.5 bn of help a year from 2015/16, funded by cuts elsewhere, will have virtually no macroeconomic impacts. Overall the only new money being spent comes from further cuts to services or from the employee and employer NICs which will be generated by the abolition of contracting out.*

But while the Chancellor appears unconcerned about our dwindling growth prospects he showed his willingness to go to extreme lengths to misrepresent the state of the public finances. With deficit reduction ‘stalled’ (in the words of the OBR) it transpired that creative accounting is responsible for the technical £100m annual borrowing reduction. It’s not clear this strategy will be sustainable. Last night’s news led with the dodgy figures and with debt continuing to rise far more quickly than the Government originally anticipated (£245bn more than planned on current forecasts) it’s hard to see how the ‘deficit down by a third’ argument can continue to cut through.

But the worry here is that despite growth going down and borrowing going up, much of today’s coverage presents the ongoing ecomonic mess as an unfortunate inevitability. Making the case for an alternative that would deliver results in the short and medium term remains imperative.

Next, despite growth being halved for the 2013, and new forecasts suggesting that unemployment will fail to fall until 2016, the only mention of jobs came when the Chancellor celebrated the private sector’s job creation rates. While these were slightly overstated, it is the case that private sector employment has been rising relatively strongly. But while this is welcome the challenges our jobs market face remain profound. As the Resolution Foundation have shown, the jobs gap we face if we are get get back to pre-recession rates remains significant (and yesterday’s upward revision to forecast public sector job losses won’t help). But of course the wider ongoing challenge is the plummeting productivity that continues to characterise our demand deficient jobs market, with employees facing ongoing real wage falls.  Yet despite these ongoing concerns our struggling labour market appears to be falling out of economic debate.

Particularly worryingly, yesterday’s unemployment statistics showed youth unemployment rising – and at close to 1 million levels are still far too high. Long-term youth unemployment is 30% higher than when the Government took office. This is an area where progress is stagnant, and yet need is immense. The Government’s Youth Contract is presumably failing very badly, given we’re close to a year into its operation and as yet no data have emerged on its performance. On such a signficant issue this simply isn’t good enough.

Yesterday’s announcements also showed us that the Chancellor’s economic ‘vision’ is as ideologically driven as ever. He aspires to a country characteritsed by a  shrinking public sector where the private enterprise that has apparently been squeezed out by excessive spending is allowed to boom. Where employment rights don’t stand in the way of job creation (who cares about the evidence) and where we stop propping up the lazy poor who are made to take responsiblity for their poverty – never mind that it is both those in and out of work who are being hit the hardest by his proposals (with the VAT rise, for example, costing the lowest income working families four times more than they gain from the personal allowance uprating).

The proposal to cap Annual Managed Expenditure may have been around for a while, but is deeply worrying. While most of this budget is accounted for by pensions, it is more likely that the Chancellor has Housing Benefit in his sights. As the localisation of Council Tax Benefit will soon show, capping budgets for benefits where eligibility is determined by need leads to severe hardship, not to mention longer-term cost pressures (for example from the temporary accomodation or social care budgets needed to deal with homelessness). The Independent Living Fund provides another concerning of illustration of where this path may lead – introduced in the 80s (in response to the removal of previously needs based benefits) access was first capped to existing claimants (with assessment based not upon need by the Fund’s capacity), and most recently the Govt has announced its closure. It provides a stark example of the slow demise of support as budgets moved from AME, to DEL to eventual disapperance.

The Chancellor has also failed to heed to advice of pretty much every business organisation in the country and is ploughing on with his doomed employment rights for shares scheme, last night voted out of the Lords (with four Conservative ex Cabinet ministers among the dissenters), introducing new ‘incentives’ (at a further £200m cost) rather than rowing back. He appears determined that this ideologically driven policy, presented to Tory conference as a means to support small businesses (none of whom appear to support the scheme) to avoid ‘onerous employment regulations‘, will remain in play. Lets hope that the Commons disagree.

The public sector also continued to come in for criticism. The Chancellor is set on reducing both staff and pay and terms and conditions, and the end of his proposed pain remains some way off, with the pay cap pushed into another year. Along with the additional £11.5bn service cuts that are being proposed for the spending review the impacts on service quality and capacity will become increasingly evident over the years ahead. But there was nothing from the Chancellor on the importance of the services that public servants provide.

The Budget attempted to make a play to the very top end of the squeezed middle. The new investment in childcare was important – political recognition of the role that improving services in this area will have for wider labour market and economic performance is key – but the package looks increasingly regressive (not to mention complex) with benefits only accruing to those who are above the income thershold for tax credit/universal credit reciept. This isn’t just those on the lowest incomes – most working middle income families with childcare needs will qualify for at least some TC/UC childcare support, and so will be excluded from the new vouchers. Similarly, on housing there was hardly anything for construction, but significant guarantees for those buying homes of up to £600k.  Support isn’t limited to first time buyers – it appears those who want to buy a bigger home will also qualify. How the Treasury will limit the scheme to those who don’t have more than a 5% deposit, rather than those who would simply pocket their equity and borrow interest free from the Government, is unclear.

Finally, little thought has been given to the longer-term economic challenges we face. Business investment and trade are forecast to make an ever smaller contribution to growth, while rebalancing appears to be on hold. Although there was welcome broad support for Heseltine’s industrial policy agenda, this didn’t  extend to a committment to implement measurable success targets or providing any clarity on the amount of financial support that will be available to back the package. The Business Bank, again a positive move, remains hampered by restricted capital and a lack of borrowing powers and money continues to be frittered away on corporation tax cuts. Simply removing the public sector doesn’t seem to be working as a way to reduce the trade deficit and generate an investment boom, but there is precious little thinking going on as to what will.

This was the last Budget before the election that gave the Chancellor a real chance of delivering stronger growth in the years ahead. He didn’t take it – how long his attempts to abdicate responsiblity for our economic mess will hold remains to be seen.

*This cash isn’t free – in turn it will come from higher national insurance contributions from employees and public sector employers (who will not be able to offset higher contributions with changes to pension schemes). In turn, this looks set to lead to further effective budget cuts – costing, for example, around £900m a year for the NHS.

One Response to What does the Budget tell us about the Chancellor’s economic approach?

  1. Being tough on mythical migration problems won’t help the poor of Eastleigh | ToUChstone blog: A public policy blog from the TUC
    Mar 26th 2013, 11:48 am

    […] and thus demand and jobs, out of the economy and caused the wages of people like Sarah to plummet in real terms. Peter no doubt looked on in dismay as Osborne announced cuts to services will continue and there […]