Economic commentators disagree on many things, but there is one area they reached agreement on last week: that the next administration will inherit a mess.
They agreed that the budget had solved the problems. Paul Johnson, head of the Institute for Fiscal Studies (IFS), went further.
There was a ‘conspiracy of silence’, the IFS says between Chancellor Jeremy Hunt and his shadow Rachel Reeves over the tough spending and tax choices in the coming years. It was the worst budget outlook in eighty years.
Real? There are problems: tax revenues are heading for the highest level of GDP since the late 1940s and the pressure on public services.
But while the IFS sets the gold standard for independent budget analysis, this time there is a significant chance that the IFS – and the rest of the economic community – will be proven wrong.
Four Weddings and a Funeral: There’s a Big Problem to Address, But Four Strengths Make Our Fiscal Problems More Manageable
It’s a case of Four Weddings And A Funeral.
There is a major problem that needs to be addressed, but there are four strengths that make our budget problems more manageable.
Let’s get the funeral out of the way. It’s productivity. The Chancellor said productivity in the public sector was lower than before the pandemic.
Actually, it is lower than in 1997. It fell steadily until 2010, then rose until the pandemic, when it had regained lost ground and climbed again. Then it collapsed and has yet to fully bounce back.
This is not intended to affect government employees, and remember that in some services you don’t want higher productivity. Larger classes in schools are not great. But there is a productivity problem in the economy as a whole and in particular in public services.
The next government must remove the blockages that have hampered the private sector and make the areas over which it has direct control much more efficient. Taxpayers rightly demand better value for their money.
Britain’s four economic strengths
Now for the weddings. Outside Britain people are gradually realizing that a change has been made. Both the pound and gilts had their best week this year.
Domestic investment has increased dramatically, as Hunt and Kemi Badenoch, the Foreign Secretary, have noted. You no longer hear foreign companies with factories here harping on the costs of Brexit.
A few days ago Bloomberg – no fan of British economic policy – ran a piece entitled ‘Britain is no longer such a basket case, at least not for investors’.
British chief economist Dan Hanson thinks growth could reach 1.9 percent this year if optimism leads households to spend excess savings. I think there is a good chance that this will happen.
There is a downside: British assets are being snapped up cheaply, with private equity firms sniffing out opportunities that investors have failed to appreciate in the public markets. It is right to be concerned about this, but finally UK pension funds are being pushed to think more about investing money in UK equities.
That leads to wedding number two. We need more investment of all kinds if the economy is to grow faster, and disclosure requirements for pension funds are one way to ensure that British savings stay here.
This is something we’ve been asking for and it’s a relief to see movement. If you asked pension savers where they wanted to invest their money, they would surely be shocked to hear that funds only have a 2.7 per cent stake in UK shares. All this is in addition to the impact of a UK Isa, to the benefit of both savers and the economy.
Wedding three is our strength in the service sector, as mentioned on the previous page. There is great resistance to globalization insofar as it manifests itself in physical trade, but less so in the services sector.
Britain is the second largest exporter of services after the US, and this position is likely to increase over the next decade.
The last wedding is artificial intelligence. This is the start of something big, and it can increase efficiency in the services sector. In fact, I think this is the Holy Grail the global economy has been waiting for. Again, it is especially useful for Britain.
So yes, a huge budget problem, but also a way to solve it. You can see the bottle as half full or half empty.