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The Tory 'decade without growth'

We are reaping a poor economic harvest from decisions made by Conservative-led governments since 2010. This year’s budget will be remembered, if it is much remembered at all, for a totally unnecessary political storm about national insurance contributions. More importantly, the budget illustrated the scale of the economic challenge before the country. Labour has a duty to the nation to develop a credible economic policy. This is a point that has been especially relevant over the past seven years.

The United Kingdom’s economy has been growing faster than some had expected last summer. Those who expected a slowdown anticipated that the economic downsides of Brexit in the future would feed through to the present. This very nearly happened, especially since for a time in June and July it was not clear what government we would have.

Speedy resolution of the Conservative leadership vacuum, Bank of England intervention, and a decision not to immediately invoke article 50 all helped confidence to recover. The economy has benefited from a Bank of England interest cut to 0.25 per cent and more quantitative easing (which is nearly complete). Moreover, the global economy itself appears to have picked up. The result was growth of 1.8 per cent overall last year and something similar now expected in 2017 rather than a severe slowdown.

Growth in the UK has largely been consumer driven, with households increasing borrowing. The fall in the exchange rate, anticipating the eventual impact of Brexit, is pushing up prices. The Bank keeps revising down its estimate of the unemployment level consistent with the economy operating at capacity, after which there would be more upside pressure on wages. It now believes unemployment would have to fall to 4.5 per cent (currently at 4.7 per cent). Average regular wages however are growing at only 2.3 per cent pa, eroded by inflation at the same rate. If they do not pick up soon, real (after inflation) wages seem likely to fall, putting more pressure on household finances. No wonder the latest Ipsos/MORI poll on economic sentiment shows people becoming more pessimistic.

As the Institute for Fiscal Studies notes, GDP per person is only a little more than two per cent higher than in 2008. Yet, according to the Office for Budget Responsibility, at the end of 2016 the economy was running ‘slightly above potential‘. Paul Johnson, IFS director, has concluded that ‘What the OBR is saying is that despite that truly dismal record, all of the productivity – and with it earnings growth – we would normally expect has been lost forever. This remains the big story of the last decade – a decade without growth, a decade without precedent in the UK in modern times.’ The OBR predicts that real wages will be only at 2007 levels in 2022.

The OBR lowered its government borrowing forecast by £16.5bn this financial year, due mainly to one-off factors. As the IFS notes, the government is on track to borrow £30bn more in 2020 than predicted in last year’s budget, which is a poor showing for all the years of ‘austerity’. Net debt as proportion of GDP will, the OBR believes, peak at 89 per cent in 2017-18, only slightly down from November’s forecast.

Our public services are clearly under strain. There are further management efficiencies to be obtained, but finding them while funding is being further starved is difficult. The years of lost growth have a cost in that we cannot afford the level of public services we expect unless we borrow more. This is the painful reality. The only other way out, apart from crippling inflation, is growth with tax and spending reform.

Labour’s fiscal policy commits the party to reducing the current annual budget deficit to zero over a five year period, audited by the OBR, unless economic crisis heads interest rates towards zero. This means all current spending will have to be paid for out of taxation by the lifetime of a parliament, leaving freedom to give a much-needed boost to investment.

Balancing the current budget might well be possible after an election in 2020, relying on further spending cuts under the Conservatives beforehand. However the reality could well be different. Official forecasts rely on productivity improvements which have yet to be evident. One cause is the lack of commitment to growth strategies under the Conservatives. Moreover, it is getting increasingly difficult to cut spending further. A stronger opposition would make it yet more difficult because Tory members of parliament would be worried about losing their seats. Labour itself will find it hard to promise spending cuts into an earlier snap general election, though our rules allow for higher spending than government plans.

Labour has just published its new Policy Forum consultation documents, including Economy, Business, and Trade. This paper does not mention Labour’s fiscal rules, let alone link them with a clear strategy for growth. We also need policies which promote and celebrate ethical enterprise as a worthy expression of human creativity, from which comes productivity. Without this, we will not see the growth and higher tax revenues we need to meet spending commitments.

 This article was first published by Progress on 24 March 2017.

Progress, 24 March 2017, 18/04/2017

Not an easy task given uncertainties, especially if energy and commodity prices do fall later in the year. Ultimately, radical economic reform required.
Central banks are struggling to head off general inflation while dealing with price shocks that will be negative for growth. They waited too long, which has made their tasks more difficult.
The Bank of England has raised interest rates, but that does not mean it has been most effectively managing inflation risks.
The Bank should signal it will act if higher prices look likely to translate to higher inflation rate.
The IMF's Fiscal Monitor is actually quite radical.
Spare a thought for finance ministers, and the opposition counterparts who aspire to replace them. The conventional wisdom was that they should at least make an attempt to follow fiscal rules. Now, there are no rules.
My letter in the Financial Times on the need for a framework for economic policy decision-making.
Responding to Brian Griffiths' article in The Article on the risks of inflation.