Without productivity improvements, no political parties’ election pledges on deficit reduction can be met. The next spending review must prioritise the policies that will close the gap with the UK’s competitors.
After years of sluggish growth, the UK economy is finally recovering. But whilst the recent economic data are promising, the economy still faces a long-term productivity challenge.
In 2013, the rest of the G7’s average productivity (per hour) was around 13% higher than that of the UK. But even before the crisis, there was a gap of around 6%. The evidence suggests that compared to other countries, we need to do better, on skills, investment and innovation. Tackling this is vital for living standards, and for the long-term health of the government’s finances. Sustained economic growth will allow for a healthier tax base, making it easier to deal with the longer-term pressures on public spending, such as an ageing population.
In the shorter term, sustained economic growth in the next Parliament will also be essential to the success of deficit reduction targets. As we show in our paper on Spending Choices after 2015, the success of the three main parties’ aims all depend on much higher growth than we have seen in the past seven years. Without this, even the substantial public spending cuts outlined in the 2014 Autumn Statement will not be enough to eliminate the current budget deficit by 2020, and certainly will not be enough to eliminate borrowing and pay down the national debt.
These challenges mean that when the next government comes to make its spending choices in the Spending Review scheduled for this year, economic growth must be a priority. Clearly, government policy to boost economic growth is not simply measured by spending alone, but there are many areas of spending that are important for economic growth, and which would be not necessarily be replaced by private sector spending if they were withdrawn.
In our new Investing for Growth briefing paper, we argue that the current way in which government spending is ring-fenced and categorised is unhelpful. Both Labour and the Conservatives have picked out the schools budget as an area that will not face the same levels of cuts that will need to be wielded on other departments. But much less has been said about further and higher education, both of which are also vitally important to ensuring we have a skilled workforce. Likewise, all three parties have been strenuous in their commitments to support infrastructure spending, whilst having less to say on large parts of research and development spending that helps support private sector innovation in the UK.
The next administration must take a comprehensive and consistent view on growth-friendly spending. Commitments to protect infrastructure or capital spending risk being too simplistic when solving the productivity challenge is crucial to the long-term health of the public finances.
Nida Broughton is chief economist at the Social Market Foundation
