Speech on the Budget

Lord Skidelsky (CB)

My Lords, I will concentrate, as is my wont, on the macroeconomic implications of the Budget. That is not to say that supply-side questions are not important—of course they are. I agree with the noble Lord, Lord Maude, that a Government should not be exempt from the efficiency expected of the private sector. However, in general, efficiency is closely related to investment. The more investment there is, the more efficient an economy is likely to be, for the simple reason that there will be much less resistance to cutting costs—which in practice usually means laying off workers—if there are plenty of alternative jobs available.
 

We have 1.4 million people out of work—“too many”, the Chancellor rightly says. That would not be so bad if we could take those figures at their face value. Headline unemployment is down to under 5%, the lowest since 1975, and who would doubt that it is better to be in work than out of work? But we must remember that, as well as the wholly unemployed, millions of part-time workers say that they would work full-time if they could, many of them forced into precarious self-employment and zero-hours contracts, and there are those overqualified for the jobs they do. If we take just two categories—those claiming unemployment benefit and those who say that they would work longer hours if such work were available—about 11% of the British workforce is either unemployed or underemployed; they are unemployed on a wider definition which is accepted by the ILO.

Then we must also remember that 4.3 million families claim tax or child tax credits—subsidies to their earnings. Previous noble Lords have mentioned the study by the Joseph Rowntree Trust showing a big growth in child ​poverty. In my book—and this is my response to the comments by the noble Lord, Lord Balfe—an economy in which a large fraction, some 20%, of the workforce is permanently reliant on the benefit system for a living income is not a healthy economy.
 

The Chancellor asks us to look forwards not backwards, but we need to look backwards to explain why productivity has collapsed, why living standards have stagnated, and why the Chancellor has a Budget that remains unbalanced five years into recovery, despite his best efforts. The Chancellor said:

“The key to raising the wages of British workers is raising investment, both public and private”.—[Official Report, Commons, 22/11/17; col. 1049.].

 He is quite right. But what has happened to investment?

 In 2007, total investment was 17.4% of GDP; in 2016, it was 16.5%—1% lower. It may just have got back now. Over the same period, public investment has fallen from 3.4% of GDP to 2.6%. In other words, total investment has more or less recovered its pre-crash level, but public investment still remains below it. Instead of using public investment to offset the fall in private investment, the Government pointed public investment in exactly the same direction. One has to believe some very peculiar things to believe that a simultaneous fall in public and private investment will galvanise the economy into new and vigorous life, but they do believe those peculiar things. I wish that I had time to go into it, but they are peculiar.

In those statistics of investment are to be found a crucial explanation for tepid GDP growth, stagnant wage growth and low productivity. The British economy is forecast by the OBR to grow by an average of just 1.4% annually over the next six years. That is at half the rate that it grew between 1997 and 2007. The Chancellor places the blame for weakening growth on the collapse of productivity. According to the Office for National Statistics, output per hour is 21% below the pre-crisis trend. Why has that happened? I have been looking in vain for an explanation for that “mystery”, as it is called. But I do not think that it is actually much of a mystery. An economy whose lack of investment forces a large fraction of its workforce into low-productivity jobs is going to be a low-productivity economy.

We come to the vaunted industrial strategy. It is full of aspiration. But why is the Chancellor only now “laying the foundations”, as he puts it in his Budget speech, of the dynamic economy of his dreams? Is it because, as Anthony Hilton wrote in the Evening Standard on 16 November:

“Governments in Britain since Mrs Thatcher’s time have refused to have an industrial strategy and, as a result, we have very little industry left”.

When we come to the actual money that the Chancellor is prepared to commit to the strategy, we find some pretty thin gruel. I welcome the money for R&D.

There is also a promise of £44 billion for housing to build 300,000 houses a year, but it turns out that some of that has already been allocated and a lot of the rest is through guarantee. Why will it take another eight or nine years to reach the 300,000-house target? Harold ​Macmillan promised to build 300,000 houses a year in 1951, and he built 300,000 houses every year. Why is it now taking eight years to reach that target?

The answer is very clear. Since 2010, Governments have made liquidating the deficit and reducing the share of the national debt in GDP their top priority. No matter that they keep missing their targets, they return to them every year, but each time with a longer timeline. That means that they do not have the money available in their own world. You cannot have an industrial strategy without a much larger underpinning of public investment. It is the Government’s obsession with deficit reduction that leaves them with no money for an industrial investment strategy. We could put it technically. What they have done is concentrated on reducing the numerator—the deficit—without considering its harmful effects on the denominator, which is the economy.
 

I have often wondered why such clever people—and the Treasury is full of very clever people—have come to believe such a foolish thing. That is the real mystery, not the productivity puzzle. We do not have the time and certainly this is not the place to go into it, but it means delving quite deeply into the economic theory of public policy. As it is, all I can do is to remind noble Lords of the old adage, “Fine words butter no parsnips”.