Speech on the Autumn Statement 2018

by
Robert Skidelsky
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My Lords, I welcome the general thrust of the Budget. As the OBR says, it represents the “largest fiscal loosening” since 2010. Noble Lords have suggested that the Chancellor is spending his windfall, but I mistrust the language of “windfalls”. Windfalls are only forecasts of revenue based on forecasts of growth; they are not there under the bed, so to speak, and should be given the credence they deserve—which is very little.

Let us put that aside. We are not here to discuss the Budget, over which we have no control. We are here to discuss, as per the terms of the debate, the economy in the light of the Budget Statement—that is, how the Budget will affect the economy. The answer is: very little. The loosening of which the OBR speaks is much too small to repair the damage caused by eight years of austerity. An adequate loosening would have required an economic understanding and a moral compass beyond the reach of this Government.

The Conservative Party’s narrative has been unchanged for 10 years. The Conservatives say that the recession was caused by the Labour Government; Mr Hammond twice called it “Labour’s Great Recession” in his Budget speech. He said that the austerity policy had nothing to do with ideology: it was simply necessary to clear up the mess Labour had left. Let me put it as bluntly as I can: this narrative is economically illiterate and morally fraudulent, yet the Conservatives have lived off it for the past eight years. That makes me very angry. Take the myth of “Labour’s Great Recession”. The idea that Labour was somehow responsible for the recession is ludicrous. The banks caused it, and Governments were left to clear up the mess. The Chancellor would have been more honest had he talked about the “Bankers’ Recession”—but no Conservative Chancellor can talk that way about his friends.

A slightly more reasonable version of Mr Hammond’s story is that the Labour Government left a fiscal mess. This does not run, either. The economist Simon Wren-Lewis of Oxford University has made a detailed—and ​far from uncritical—analysis of Labour’s fiscal policy between 1997 and 2010. I will quote just two sentences. He said that,

“any claim that the UK fiscal position was dire before the onset of the Great Recession is not tenable”.

He also stated:

“The line that the Labour government was responsible for leaving a disastrous fiscal position … is pure spin”.

I want to emphasise that, although Professor Wren-Lewis supports Labour, no competent analysis of Labour’s fiscal record would differ greatly from that summary. In any of its forms, the story of “Labour’s Great Recession” is a myth.

Let us exclude the myth and ask whether austerity was a necessary policy in 2010, as the Chancellor claimed and as the noble Lord, Lord Higgins, who is not in his place, accepted. The answer is no. The economics of the matter are straightforward. If the private sector reduces its spending, the Government have to increase their spending to plug the gap. If they cut their spending as well, it deepens and prolongs the recession. The only counterargument is that austerity was needed to give confidence to the markets. But the evidence is unarguable that any confidence-boosting effect of cutting spending—on the poor, it must be said—was overwhelmed by its depressive effect on total spending.

No competent economic authority now disputes that this is what happened—so why go on denying it? Martin Wolf of the FT called austerity a “large unforced error”. That well-known left-wing firebrand Mark Carney, Governor of the Bank of England, estimated at the end of 2016 that austerity had,

“on average, subtracted around 1 percentage point from demand each year”.

Cumulatively, that has left the British economy about 6% smaller than it would have been; in round numbers, it knocked £125 billion off the economy in that period. We are told that the divorce settlement from the EU will cost £35 billion or so, but the coalition Government cost the economy £125 billion.

I do not want to claim that the past eight years have been a tragedy like the First World War, which we remembered recently, or even the great depression. I do claim that the coalition Government inflicted quite unnecessary harm on the British people, which they have never acknowledged or apologised for.

The Budget has to be judged by the extent to which it sets about repairing the damage. It is not enough to say that austerity is coming to an end; it has to be reversed sufficiently to make up for the harm that it has done. This cannot happen unless the harm is acknowledged.

The damage is most clearly seen in the low growth figures, which other noble Lords alluded to. Far from bouncing back as vigorously as is usual after a deep collapse, the British economy has been growing at less than 2% a year since 2010. That is well below its historic trend and, as the noble Lord, Lord Hain, pointed out, things are expected to get worse. The OBR forecasts growth to be 1.5% on average over the next five years.​
These are dreadful figures. Britain is near the bottom of the G7 countries. If we take into account the growth in population and the large inequality in income distribution, there is little room for an improvement in the real living standards of most people in the next five years.

The reason for low economic growth is the collapse in productivity. British workers work longer hours than workers in Germany, the Netherlands, France and Denmark, but they produce less for those hours. Annual growth in productivity has plummeted from average annual rates of about 2.3% before the great recession to 0.4% in the past decade. The Resolution Foundation states that,

“had the pre-crisis trend continued, productivity would be more than 25 per cent higher than it is today”.

I agree with Andy Haldane of the Bank of England when he says that we have a “long-tail problem”, but our tail has become longer than it was because our path back to headline full employment—in itself very welcome—has consisted largely in multiplying the number of low-productivity jobs at the expense of high-skill services and manufacturing. Look at the cuts in investment in housing, education and public services since 2010 and you have a pretty good explanation for the collapse in productivity.

The Budget could at least have begun to reverse this trajectory. Instead, we are promised a bagatelle for the British Business Bank, “a little extra” for schools, public toilets and potholes, a little relief here and there—and yet another inquiry into the productivity puzzle.

Over everything hangs the fear of the deficit. Some commentators even fear that the Chancellor has given away too much, too soon if he is to balance his books—but balancing the books should never have been an objective of policy. Balancing the economy should have been the objective, with a balanced budget as the happy by-product of sensible policies for ensuring strong economic growth. The hard-working British people, whose praises the Chancellor never ceases to sing, deserve better than he is prepared to give.