The UK chancellor, George Osborne, last week delivered his latest government budget. Characteristically, it was loaded with crafty political moves, and although some of the announcements proved that he is more pragmatic than the image he presented in the recent election campaign, on some of the big economic issues facing the UK, it was sadly lacking. On housing, productivity and the current account, Osborne is largely missing a trick.First, the politics. The big announcement of a new ‘national living wage’, which is really just a faster rise in the minimum wage, is an attempt to outflank the left by using the language of the living wage campaign, although what he proposed falls short of their proposal. The Labour party, consumed with electing a new leader and bruised by their electoral defeat, could hardly object to a rise in wages for low earners. However, this rise will not compensate the poorest workers who will have their tax credits frozen for several years. And the Office for Budget Responsibility have clearly stated that the NLW will cost jobs, though how many is highly uncertain. It might encourage firms to invest more in training and other methods designed to raise productivity, but this outcome is also very uncertain.
After talking tough on the deficit for much of the last parliament and through the election campaign, Osborne has performed a U-turn and raised taxes significantly as part of his austerity after claiming during the campaign that essentially all the fall in the deficit would come from spending cuts. Spending will fall under the new plans, but at a slower pace than previously promised. The elimination of the deficit will also take one extra year, and here again the chancellor has proved more pragmatic in practice than the image he presents. Maybe this is all part of his plan to sustain the confidence of the financial markets. So austerity will be relatively less severe, and will be more akin to the election campaign promises of his political opponents. This is welcome, but misses the real economic challenges facing the UK.
On housing there was little to encourage the needed dramatic increase in supply. The average age of first-time buyers has been rising in recent years and the demographic of home owners has caused a huge redistribution of wealth from the young to the old, which is essentially arbitrary and cannot be justified. With property often treated more as an investment than a home, this encourages a misallocation of resources away from more productive industries, and a need for rising private borrowing. Britain needs a boom in house-building and Osborne has done little to help.
Also vital to the UK’s continued prosperity and rising wages across the economy is a pick-up in productivity, which has stagnated in recent years. With a tightening labour market and workers becoming more scarce, firms may be encouraged to invest in new productivity-enhancing capacity, which would allow wages and profits to rise together. The expansion in apprenticeships announced in the budget will certainly help in this area, helping to produce a more productive labour force over the longer term. But Osborne has no plans to significantly increase public investment in infrastructure, which is so important to long-term growth. Labour’s electoral plan to balance the current budget would have allowed for a significant expansion in public investment, and the chancellor should have stolen this idea as well.
What the UK really needs is a boom in house building, but also in exports, which could help to close the large current account deficit, nearly 6% of GDP in 2014, and stimulate productivity-enhancing investment. It would also, if sustained over a number of years and especially if the current account shrank towards balance, help to reduce the debt of the private and public sectors as a proportion of GDP. A lower value of sterling would certainly help here, and a slow-growing European market remains a problem, but British companies should be seeking out new markets abroad, and the government can provide support for this. Once again, the UK economy is too reliant on debt-fuelled consumption and housing, and remains seriously imbalanced, which will act as a constraint on long-term prosperity.
In sum, the governments ‘long-term economic plan’, which is actually more short-term and yes, occasionally more pragmatic, than ministers trumpet ad nauseam, will not work without a strategy for achieving more balanced economic growth, in terms of international trade performance and in the regions beyond the South-East of England.