Four tests of whether #Budget2017 will deliver for working people
As she started her campaign to be Prime Minister, Theresa May promised to put the power of government in the service of working people.
So far, there’s little sign that the Chancellor has got the message, with his pre-budget interviews focusing on ‘fiscal discipline’ at the same time as pressing ahead with unnecessary cuts to corporation tax.
We’ve set four tests for whether the budget itself gets closer to fulfilling the Prime Minister’s pledge.
- Will the budget give Britain a pay rise?
- Will we see another worrying increase in consumer debt – a measure of the extent to which living standards are under pressure?
- Will the government put the investment needed into infrastructure, giving businesses the support they need to boost jobs and pay?; and
- Will the government give public services – in particular, health and social care – the financial support they need to continue to deliver for working people?
Below we’ve set out the key numbers we’ll be looking out for to assess whether this is a budget that delivers for working people.
TEST 1: Will the Budget give Britain a pay rise?
The key number: Will real pay have returned to its pre-crisis peak before the end of the parliament?
Real earnings in 2016 were still £23 below the pre-crisis peak in 2007.
For seven years, wage rises were outstripped by price rises. Now after only modest increases in 2015 and 2016, real earnings are forecast to slow again.
These earnings outcomes are genuinely exceptional. TUC analysis has shown the decline is the most severe on UK records that extend back to the mid-1850s when Queen Victoria was on the throne. Britain also stands out compared to advanced economies: the UK decline in real earnings since the crisis is comparable with that only in Greece (and 103 out of 112 in a world league). While the government always argue that wage falls should be seen in the context of job gains, plenty of countries have seen both wage rises and employment growth.
At the Autumn Statement the OBR forecast that earnings would only regain the level seen at their pre-crisis peak in 2021, after the end of the current parliament. Following the better than expected economic performance after the referendum, they may now judge that wages will recover slightly faster.
(The Chancellor has also been blessed with a more favourable global economic position, though one that is contingent on staggering levels of quantitative easing by the ECB, the Bank of England and the Bank of Japan.)
The most obvious test is whether after the Budget the pre-crisis peak for living standards will be restored sooner, at the very least by the end of the current parliament (i.e. 2020) – as on the imaginary projection below:
Real average weekly earnings, 2016 prices
Source: ONS and OBR projections
Even then this is the lowest bar imaginable. From the end of the Second World War until the end of the twentieth century, real earnings grew by an average of 2.3% a year (chart below). As we entered the twenty-first century, real earnings growth decisively slowed. In the 2000s, the financial crisis meant growth was only 1.4% a year. On the current projections, annual average real earnings growth in the 2010s will be only 0.4% a year, split between a decline of -0.5% a year under George Osborne and a projected rise of 0.9% a year under Phillip Hammond – less than half the long-term norm.
Average real earnings annual growth, by decade
Source: Bank of England historical database, ONS, and OBR projections
TEST 2: Will rising consumer debt reveal living standards under strain?
The key number: Will consumer debt exceed the pre-crisis peak before 2019?
The flip side of the improved economic numbers is the intensified reliance on consumer spending. Given the scale of the crisis in pay, higher consumer spending can only be achieved through higher consumer borrowing.
It is widely recognised that consumer credit has recently been growing at a pace of around 10%, the highest growth rates since the consumer boom in the 2000s. On the current OBR projections, there is an increase into 2016 of 2.8 percentage points in unsecured borrowing as a share of household disposable income (including consumer credit and student loans), the sharpest increase since 2002. The OBR currently reckon consumer credit will match the pre-crisis peak of 43.7 % of disposable income in 2019. We’ll be looking to see if they move that date forward – given the increasingly prominent worries about the scale of consumer borrowing.
Unsecured consumer debt as share of disposable income
Source: ONS and OBR
TEST 3: Will the Chancellor put the investment needed into infrastructure?
The key number: will public investment match the OECD average?
The Chancellor’s Autumn Statement announced a ‘National Productivity Investment Fund’ of £23bn (spread over the rest of the parliament, not per year). Even with this spending, public investment as a share of GDP will be lower in the current parliament than it was in the previous one.
Moreover, this spending still leaves the UK a mile behind other countries. A comparison with OECD countries shows UK government investment of 2.7 % of GDP in 2015, well below the OECD average of 3.7%. By the current spending plans, the OBR figures show that in 2020 this will rise to 2.9% of GDP, not enough to change our league position by even one place (on the assumption that other countries’ ratios are unchanged). We will still rank 20 out of 27 countries. The difference of 0.8% of GDP corresponds to around £18bn of GDP in 2020.
Government investment in 2015, % GDP
Source: OECD National Accounts Dataset 11: government expenditure by function and TUC calculations
(Note that these figures are based on national accounts rather than the public sector finance definitions, though they are not vastly different; the latter tend to be prominent on Budget day; the former are necessary for international comparisons, and the OBR publish the relevant UK figures and projections in their supplementary material.)
If you are wondering why Germany, in particular, is doing worse than the UK, this is because the government story is of course not the full story for investment. On the basis of private investment, Germany is ahead of the OECD average.
Private investment in 2015, % GDP
Source: OECD data and TUC calculations
Of the countries with weaker government investment than the UK, only Portugal and Italy have below average private investment. To put it another way: most countries that have weak government investment are less badly placed as they have stronger private investment.
TEST 4: Will the Chancellor give public services the funding they need?
The key number: Will government current spending growth reach 3% a year?
The need for the Chancellor to invest in public services could not be more clear. While social care may be first in the queue for extra funding, the health service, education and local services are all under severe pressure.
Public service workers are under pressure too, as ten years of pay restraint start to bite. A typical midwife will see real pay cuts of over £3,000 over the course of this parliament.
The key test for whether the Chancellor is prepared to show the government is willing to invest in the public services workers rely on, is not whether he puts additional money into social care – vital as that is- but whether he’s prepared to do so without seeing other departments take the strain. That is, the overall level of departmental spending needs to rise.
At present, as the OBR set out in their Economic and Fiscal Outlook, the pressures on departmental spending (when adjusting for changing prices and increases in the population) are set to not only to continue but also to intensify.
But this chart is not necessarily prepared as a matter of routine, so we need to look for other ways to assess the government’s actions.
This is easier said than done, not least because part of government spending depends on wider economic conditions. So if economic conditions deteriorate, certain government expenditures (e.g. on benefits) increase automatically.
From a macro point of view, the best way to judge current spending is by growth in cash spending excluding these so-called transfers (as well as benefits, mainly pension and interest payments) over different parliaments. This corresponds to the national accounts measure of general government final consumption expenditure. The chart below compares the growth of this spending measure over the present and two previous parliaments.
Government expenditure (excluding transfers), annual growth
Source: ONS, OBR and TUC calculations
So under Labour over 2004-2009 spending grew by an average of 6% a year. In his first Parliament, George Osborne slashed spending growth to 1.5% a year (he had hoped to do ‘more’, but backtracked when the damage to the economy became obvious). For his second term, he set out plans that had government spending growth at 1.3% a year. While he didn’t survive to see out these plans, the new Chancellor Phillip Hammond set out plans at the Budget that put spending at 1.5% a year. (NB I am ignoring the figure for the final year as outside the current parliament, even though the government’s enthusiasm for spending at this point is very striking.) The obvious benchmark is whether spending increases break decisively with these very low figures. If it was set at 3% a year, then it would be double the pace of growth in the last parliament, and go halfway to the stronger spending under Labour (as well as longer-term norms).
To sum up, the level of spending cuts in this parliament is currently imperceptibly different to the last. In spite of the changed rhetoric, public investment spending as a share of GDP is forecast to be lower than in the last parliament. And current expenditure growth is projected as unchanged. The TUC has long argued that the government can’t afford not to borrow more to invest in public services and that the current policy of austerity has hindered rather than helped the public finances (see here for example).
But as well as differences in macroeconomic analysis, there are obviously also political choices. If the Chancellor wanted to stick to his budget ‘envelope’, one option would be to reverse the corporation tax cuts announced by his predecessor – set to cost £13bn by 2020-21 (see Figure 30 of the Resolution Foundation budget document).
In the meantime, the latest rhetoric around the need to build up a ‘war chest’ seems too much like an excuse not to tackle the sharp declines in living standards and public services that working people across Britain are experiencing now. Given the scale of economic let alone social damage inflicted over the last parliament and the immediate threat of Brexit, the need is for action. At his last spring Budget, it is up to the Chancellor to prove that when Theresa May said she wanted to deliver for working people, her Government would deliver it.