Amidst the shambles of the House of Commons this week the Chancellor cut a strange figure when he rose to deliver his Spring Statement. Last year he abandoned the practice of a Spring budget and instead decided to concentrate his fire power on an Autumn budget and contented himself with a Spring Statement with few new fiscal proposals. I responded to that by publishing on these pages an open letter to the Chancellor[i]
in which I congratulated him on this new practice but criticised him for not going far enough on a whole range of measures.
This year I could do the same and make the same arguments as virtually all of the problems I pointed out are not being addressed. But instead I will make some new arguments prompted by the propaganda that comes out of his office and that of the Conservative party. I will quote this verbatim in italics below and then add my own comments.
“Today’s Spring Statement shows a resilient economy which is creating jobs and delivering the fastest rate of wage growth in over a decade”
Most of the new jobs created in the recent past have been taken by immigrants and are low wage, low skilled jobs. Wage growth was indeed sluggish for nearly a decade and so to see it rise a little is welcome but it still means the gap between rich and poor is huge and indeed dangerously high.
“The deficit this year is £3 billion lower than last forecast and debt is lower every year – with lower taxes on families and more being invested in our public services.”
I welcome a reduction in the deficit but it is still enormous. It was supposed to have been zero after nine years of ‘austerity’. Most independent observers would say that cuts in public services have gone too far with families being asked to pay for books in school and the justice system creaking to a halt.
“This Spring Statement sets out our plan for a bright future for Britain – creating a digital economy people can have confidence in, redoubling our commitment to skills and world-class infrastructure, staying at the cutting edge of clean growth and tackling the big challenges like knife crime and period poverty in secondary schools.”
In this Statement Mr Hammond announced new plans to invest £79 million in ARCHER2, a new supercomputer to be hosted at Edinburgh University, £45 million of NPIF funding to the European Biometrics Institute for genomics research and £81 million in a new Extreme Photonics Centre in Oxfordshire to develop new types of lasers. Thus he was providing a total of £205 million to keep Britain at the forefront of new technology. This compares with Amazon’s R&D expenditure last year of $22.6 billion, Alphabet’s (parent company of Google) $16.2 bn and Samsung’s $15.3bn.
The reference to knife crime was an announcement of an extra £100 million for the police, just days after Mr Hammond himself had said that the police had to manage with their current resources. The reference to period poverty was a no doubt welcome announcement that he would fund the provision of free sanitary products in secondary schools and colleges from the next school year following a campaign by Head teachers that some girls are missing school attendance due to inability to afford such products.
“The key stats you need to know.
Wages will rise faster than previously expected. The OBR[ii] have (sic) revised up wage growth in every year to 2023, with wages growing faster than prices in each year and reaching a record high rate of 3.3% growth in 2023.”
Firstly, these are not ‘stats’, i.e. statistical facts. They are forecasts and therefore do not have any statistical basis whatever. The one certain thing is that they will be wrong, not least when you learn that the OBR’s forecast quoted extensively by the Chancellor was made working on the assumption that Mrs May’s atrocious deal would be approved by the House of Commons and so implemented on the 29th March. It may still be but it was heavily defeated for a second time in the House the night before, a fact which Mr Hammond in his speech greatly regretted and he expressed his view that “leaving without a deal would mean …. a smaller less prosperous economy in the long-term.” Now, I happen to disagree with that but if Mr Hammond believes it, it made everything else he said seem rather pointless.
“Employment will continue to rise. The OBR expect (sic) to see 600,000 more jobs by 2023, meaning in 2010, (sic) there will be 4.1 million more people in work by 2023.”
Yes, that’s what the Conservative party said. It’s obviously drivel, not just because it’s a forecast (see above) but also because it’s grammatically confused. I think they’re trying to say that compared with 2010, i.e. when Labour left office, there will be 4.1 million more people in work in 2023. I have two problems with this:
a. We need to talk about the quality of jobs not just the quantity. (see above).
b. There are many forecasts going around that refer to the vast number of jobs that will disappear over this time frame owing to artificial intelligence and robotics. I have seen no reference in the OBR to this. That is because it takes the Treasury model which only looks back historically and projects the future based on present assumptions.
“The economy will grow in every year. The OBR expect the economy to grow at 1.2% this year, faster than Germany, accelerating to 1.4% in 2020 and to 1.6% in each of the final three years.”
The economy has been growing for ten years or so now since the major financial crash of 2008-09. It is extremely unlikely that a mature economy could grow continuously for as long as fifteen years. It would be unprecedented in the modern era. Even if true these are low rates of growth, less than 8% over five years. The population is forecast to grow by more than 3% over that time so the real rate of growth, even on the OBR forecast, will only be about 1% per year, not enough to deal with the population’s growing expectations in public services with an aging population.
“The deficit has been revised down in each of the next five years. The deficit will be £3 billion lower than expected this year, down to 1.1% of GDP from almost 10% under Labour.
I would welcome this, of course, but just emphasise that it’s a forecast, that it depends on the accuracy of the other forecasts and that these are still very high levels of deficit.
National debt has also been revised down in every year. Debt has been revised down in every year and is set to fall as a share of GDP in every year, from 82.2% next year to 73% in 2023-24. Its first sustained fall in a generation.
UK national debt is about £1.78 trillion. The interest that the government is paying on this debt is about 4% of GDP or £48 billion, much more than we spend on defence which is about £36 billion.
Mr Hammond tried to stay upbeat despite his concerns over Brexit and that is what he has to do. It is very hard indeed balancing the public’s unrealistic expectations over public services with their quite natural reluctance to pay any more in taxes themselves. But to change the dynamic requires more than guarded optimism and tinkering around the edges of the economy. It requires bold and imaginative planning and implementation.
For example, one of the biggest problems with the British economy is its lack of relative productivity. On conventional measures Britain is significantly less productive than say France or Germany. Mr Hammond knows this but although he spent a significant part of his speech on the subject he did not convince me that he understands it. After referring briefly to investment in infrastructure and returning technical and vocational skills to the heart of our educational system he then said “the productivity agenda is, above all, about increasing the wages of the lowest paid”
I am sure that many of us would want to see an increase in the wages of the lowest paid. I wrote earlier about the problems of the pay gap between rich and poor. However, that has the effect of reducing productivity not increasing it. In fact one reason why French productivity is higher that ours is they have higher unemployment. Productivity is the mathematical result of dividing output by the cost of employment. The best way for a business to increase it may indeed be investment in artificial intelligence and putting people out of work. But that’s not socially desirable so that’s why government has to come up with alternative ways, investing in skills training etc.
In his nearly five thousand word speech I did not see the evidence that Mr Hammond understands that, or, if he does, has the ability and the bravery to address it.
Office of Budget Responsibility