A deficit of growth

6 May 15

Poor economic performance could derail manifesto pledges, but ambitious targets for productivity are missing

'We will go from stuck in the red, to back in the black,’ quips the Conservative manifesto. ‘A Labour government will cut the deficit every year,’ runs the counter-claim. The two versions of austerity are far from the same. Labour could achieve its fiscal objective by relying mainly on increased tax receipts. The Conservatives promise £13bn of cuts in departmental spending in the two middle years of the next parliament (budgets for 2015/16 are already set) and a £12bn reduction in the welfare bill. Both sets of commitments are highly contingent on what happens to the economy.

Our analysis at the Social Market Foundation suggests that, if productivity growth remains as weak as it has been since the recession, then by 2018/19 the deficit will be £90bn without further cuts or tax increases. On the other hand, if productivity growth reaches the highs of the early 1970s or 1980s, no further cuts will be needed after 2015-16 to reach a balanced budget. These are extremes. But even a small change in the economy could result in a permanent improvement – or setback – in the public finances. That difference could easily be bigger than any gap due to the different fiscal policies of the two main parties.

With that in mind, what policies do the manifestos offer to grow the economy? Labour’s manifesto cover announces that ‘Britain only succeeds when working people succeed’, and promises an increase in the minimum wage to £8 an hour by 2019. This looks largely the same as the Tory proposals. Effectively, in four years’ time, the minimum wage in the UK as a proportion of median wages will reach what the OECD average was a year ago. A more ambitious objective for improving productivity – and hence wages and tax revenues – is lacking.

Labour goes on to name some measures for ‘building a long-term investment culture’. It proposes an independent infrastructure commission. This proposal complements the greater flexibility Labour is giving itself to increase capital spending. It is, though, noticeable that the Conservatives give more detail on what could be built and where in the next five years.

The same difference emerges on ‘industrial strategy’. Labour’s manifesto has hints of new industries and jobs: low carbon technologies, robotics, 3D printing and Big Data. Hints are all they are. The Conservative document is the more activist: ‘we will boost our support for first-time exporters’; ‘treble Start Up Loans programme’; ‘£2.9bn for a Grand Challenges Fund’; ‘a 25-year plan to grow more, buy more and sell more British food’. The value of some of these measures is debatable but laissez faire they are not.

The harder problem for the UK is likely to be skills. Past improvements in productivity owed a lot to the expansion of higher education. Intermediate or vocational skills have long been under- supplied. Both manifestos hint at moving beyond the numbers of apprenticeships to improving their quality. This will cost money but neither offers protection for the skills budget. Labour may act against ‘freeriding employers’ who don’t provide any training. The Tories plan an exemption from employers’ national insurance contributions for apprentices under 25. Over a parliament, either policy might be the starting point for a more ambitious strategy.

One final note: the biggest risk to the public finances is another recession. By the middle of the next parliament, it will be 10 years since the last downturn began. The private fear of many in the Treasury teams behind these manifestos may be that another recession will hit before we’ve cleared up the deficit left behind by the last one.

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