Philip Hammond preparing his Autumn Statement. Photo: WPA Pool / Getty
Budget blogs: Springing into action…
The new(ish) Chancellor’s first Budget, due on 7th March, would normally be seen as a key political moments in the year. It’s an opportunity for Government to dominate the headlines and give a cash based indication of their priorities. But with Brexit hoovering up political attention, not to mention what’s happening across the Atlantic, there’s a chance that the 2017 budget will be viewed as simply as a minor accounting exercise.
While we’re no fan of the ‘rabbit from a hat’ approach to fiscal policy making, we think that would be a mistake.
With living standards and public services under severe strain, the Budget should be the moment when the Chancellor shows he’s serious about ‘an economy that works for everyone’, and prepared to confront the failures of his predecessor to deliver it
Throughout this week we’ll set out what we think getting serious would mean. We want to see the Chancellor setting out reforms to build the kind of economy that can support higher living standards, and investment that prevents our public services spiralling into crisis.
First up however, it’s worth considering the economic challenges faced by the Chancellor as he considers his options. It’s a less than cheerful mix of uncertainty (about economic growth) insecurity (at work), weakness (in pay), and inequalities (across the country).
Perhaps the biggest challenge the Chancellor faces is uncertainty. While the economy has performed better than hoped after the referendum, growth is expected to slow in 2017, with the Treasury’s round up of independent forecasts predicting GDP growth of 1.4% in 2017 – down from 2% across 2016. But as the IFS set out in their Green Budget last week, forecasting the economy at present looks like risky business. Not an organisation given to overstatement, they argue that “the degree of uncertainty surrounding the financial forecasts is virtually without precedent”.
It’s worth remembering that even before the Brexit vote growth had consistently disappointed expectations. Since the financial crisis average growth has been 2%; well below the pre-crisis (1981-2007) average of 2.8 %. And perhaps there’s some sign that the Chancellor recognises that the previous government’s approach of cutting public spending and hoping that the private sector will fill the gap isn’t working; the IFS show that his new fiscal rules allow for £25bn of extra spending in 2020/21, and as the TUC has consistently argued, there’s plenty of evidence that spending cuts are hurting rather than helping the chances of restoring the public finances to health.
But it’s not just the level of growth the Chancellor should be worried about. It’s who that growth benefits. While he might be facing uncertainty about the national budget millions of workers face even greater uncertainty about their weekly pay. We estimate that one in ten workers in the UK now face insecurity at work – whether that’s because they’re in low paid self-employment, on a zero hours contract, or working for an agency or seasonally with little access to rights. This isn’t all about new technology either: research for the TUC shows the industries contributing most to the rise in insecure work are hospitality, social care and education. An economy that’s delivering rising insecurity isn’t one that’s working for everyone.
While insecurity is rising, pay remains flat. Real pay growth (adjusted for inflation) has been stuck at 1.7 per cent for the last five months (see chart 1), and remains well below its pre-crisis peak. While pay growth was slowing even before the financial crisis, the recent squeeze on pay is the longest since at least Victorian times.
The Office for Budget Responsibility (OBR) forecasts at the time of the Autumn Statement offered little comfort, showing that real pay is not expected to recover to its pre-crisis levels until 2020/21, with the forecast for average real pay in that year now downgraded by £1,000 relative to the prediction at the time of the last Budget, due both to higher inflation (as a weaker pound feeds through into higher prices for imported goods), and a weaker economy, and therefore pay. There’s a real risk that another living standards crisis is just around the corner.
Weak pay can be seen as one sign of an unbalanced economy, with growth almost wholly reliant on British consumers’ willingness to keep shopping (see the red bars in the chart below, which show that household consumption is the main contributor to GDP growth). It also poses a risk to this model continuing, as rising levels of household debt place a limit on people’s ability to keep on spending– as well as putting their personal finances at risk.
Demand / Contributions to GDP(E) growth, percentage points
While the reliance on consumer spending in Britain isn’t a new feature of our economy that doesn’t mean it’s not something to worry about. That’s equally true when it comes to the other big imbalance in our economy – the skew in growth towards London and the South East. In both 2014 and 2015, London’s growth (measured as GVA) per capita was double that of the average across the rest of the UK.
But just because regional disparities have persisted doesn’t mean they’re an inevitable feature of a modern economy. As the chart below shows, the gap between the richest and poorest region of the UK is larger than most other OECD countries, behind only Belgium, Hungary, and the Czech and Slovak republics.
GDP per capita gap between richest & poorest region
So as the Chancellor faces up to these challenges there’s no place for fatalism. In our next blog we’ll set out what an activist agenda to tackle these issues could look like.