Political Economy

04/12/2014 at 6:12 pm

Yesterday’s Autumn Statement by UK Chancellor of the Exchequer George Osborne was as political as expected. Impressively – and in a break with recent tradition – some of it was not leaked in advance. And beyond the Stamp Duty Mansion Tax, road building in marginal constituencies, wealth fund for hypothetical shale gas production in some long-distant future and customary crowing about how wonderfully the British economy is doing, there were a few items of actual economic interest. (There is a good summary of all the key points from the BBC here.)

It’s great that growth for this year is expected to come in at 3%, up from 2.7% in March, but as has been widely noted, the level of debt will be higher than forecast in spite of this. It is worth quoting the Office for Budget Responsibility directly (all documents here):

[W]age and productivity growth have once again disappointed, while national income and spending have outperformed most in those areas that yield least tax revenue … For these and other reasons, this year has seen a sharp fall in the amount of tax raised for every pound of measured economic activity. As a result, despite strong economic growth, the budget deficit is expected to fall by only £6.3 billion this year to £91.3 billion, around half the decline we expected in March. That would be the second smallest year-on-year reduction since its peak in 2009-10, despite this being the strongest year for GDP growth.

Hmm. Wage growth has indeed been disappointing. As regular readers will know, UK wages have been falling pretty steadily in real terms since the Great Recession. This has been due to both sluggish growth in absolute terms, and – if you have been the Bank of England over the period – completely surprisingly high inflation. In fact, adjusting for RPI, average earnings are back down where they were in the summer of 2000. Putting this another way, British pay packets have not grown in real terms so far this century.

Part of the reason for this is that inflation has been pushed up by increases in VAT, necessary because of the vast level of government borrowing. Even in nominal terms, though, wage growth has averaged a measly 1.5% per year over the last half decade. Why so? Well, public sector wage growth has been capped at 1% for some time, a necessity arising from the vast level of government borrowing. Wages in the manufacturing sector have also been squeezed, which might be connected to the pace of demographic change in the recent past (the gap between real GDP growth and real growth in GDP per capita having risen to 0.8% over the last ten years, above even the high caused by the post war baby boom). And some higher-end pay, in areas of financial services for instance, has suffered too.

In other words, the higher taxes and lower wages caused in large part by the desperate state of the public finances have themselves contributed to a disappointing outturn for the public finances.

Lest one might think that, to coin a phrase, there is an alternative, remember this: the central government debt interest burden is projected to rise to £54bn this fiscal year and to £77bn by 2018/19, the year in which the government’s books might finally balance. Even this year the payments will be more than twice the total current budget for defence. Viewed sensibly, Britain’s debt is already out of control. Worsen the debt burden from here and it could end up entailing default.

This sounds a bit gloomy, because it is. However, was there anything in the statement to give encouragement?

In the context of sovereign debt, the only real positive is economic growth. So it is unfortunate that the anti-bank and anti-wealth elements of yesterday’s announcement will do nothing to stop London’s slide down the rankings of global financial centres in future years. Only a couple of weeks ago there was a survey out showing that New York’s lead over London as a good place for financial sector business had extended (London used to come top of these lists). Bits and bobs of capital spending were announced which will have some positive effects in the relevant areas over the medium term, but growth does not generally benefit from increased regulation of and taxes on business.

The UK is clawing its way slowly towards a balanced budget, having already amassed a punitively expensive burden of debt. Budgets and Autumn Statements / Pre-Budget Reports have been overwhelmingly dominated by political gimmickry for at least the last ten years. It is difficult now to remember budget speeches in which pound note figures for spending and receipts connected to policy changes actually got a mention (standard practice until the arrival of a Mr Brown in 1997). Our Chancellors have little leeway nowadays, but yesterday’s little attacks on banking and The Rich were fiscally unnecessary and potentially damaging. (Listed banks in the UK employ about 700,000 people, over 2% of the nation’s workforce, and that is already down from almost 900,000 in 2007.) Britain’s economic policy remains primarily a vehicle for electoral showmanship, and this is not encouraging.

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