When the Chancellor gave his speech today, he talked about GDP growth being revised up from 2.4% to 2.7% this year. He also talked about the deficit coming down. But while the Office for Budget Responsibility has indeed revised GDP up this year and next, it has revised it down for future years – from 2.7% to 2.5% in 2018.
There has been a quicker recovery than expected, but there is no evidence to show that the underlying health of the economy has improved, and that growth will be sustainable in the long-term. Stronger private consumption has been facilitated by lower savings, not higher incomes. Once households deplete their savings, they won’t be able to continue spending.
The OBR sees little change in the UK’s long-term prospects. Even worse, it now expects the rising population to contribute more to growth, and less to come from increases in productivity, which they see as 'exceptionally weak'. While some have predicted that GDP will surpass the 2007 peak during this year, that is only true in aggregate terms; on a per head of population basis, GDP is not expected to return to its pre-crisis peak until 2017.
The consequences are clear. Earnings growth will remain modest in real terms. And while the deficit is forecast to fall, this is not solely due to growth creating increased tax revenues. Public spending will continue to be cut even while the economy is growing. By a quick calculation, the cuts still to come in departmental budgets after this year may be up to 20% in real terms by 2018-19.
Is a different future possible? Certainly there could be bolder moves to boost productivity. The Chancellor offered some measures on this, for example, boosting the tax incentive for business to invest in plant and machinery. Given that a lot of business investment tends to be in property instead, this is a useful counterpoint and may allow more productive investments to better compete for finance.
However, on the whole, the Budget measures in this area are modest in ambition. An extra tax credit for SMEs to invest in R&D is costed at about the same level (£50m in 2015-16) as the reduction in bingo duty (£40m) that the Chancellor has also announced. Extra funding for Catapult centres for cell therapy and graphene is a mere £25m, a fraction of what a country like China is spending on graphene alone, a material on which it has 2,200 patents compared to 50 in the UK even though it was discovered here.
By contrast, the big and ambitious measures from this Budget – those relating to pensions and saving - may actually reduce the amount of productive investment in the economy. The Stocks and Shares ISA, which draws money from ordinary savers into the stock market, is being rolled up with the more generic ISA, running the risk that savings in this product are no longer channelled towards business growth at all. Equally the incentives for people to withdraw money from their pension pots may mean that they consume more, sustaining the current recovery, while running down the funds available to pension funds to invest for example in infrastructure, a likely source of long-term productivity growth.
To a cynical eye, it may look like the Chancellor is trying to leverage existing pools of savings to keep the economy growing strongly in the short-term. At the very least, this Budget misses an opportunity to focus on the underlying productivity problems in the economy. If we did that, we might be able to ensure that growth is stronger in a few years’ time rather than weaker.
