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Spring Budget 2017: P is for Productivity

Spring Budget 2017: P is for Productivity

Gareth Brown, Associate

Philip Hammond’s first (and last) Spring Budget, due to be laid before the House of Commons tomorrow, has crept up on us – it seems like only yesterday that he delivered the slight non-event that was the Autumn Statement.

Until the Sunday papers past, and a sort of muddled opposition speech from Labour’s John McDonnell last week, The Budget, normally a colossal event in the political calendar, has flown totally below the radar – that was until the media got a whiff that there might be extra money available from the revised borrowing figures and better than expected economic growth forecast.

Hammond’s interventions over the weekend, notably in the Sunday Times and on Sunday morning television suggest a management of expectations. Aside from the usual leaks to test public opinion, everything seems to be in order. Strangely, because it actually does seem to be in order.

The Chancellor’s well crafted remarks over the course of the weekend, as usual, tell us a few things about what we can expect to see on Wednesday, but perhaps more importantly they shed some light on the current thinking in the Treasury and what we can expect to see from him over the next few years.

But firstly, it is worth briefly revisiting why this is his last Spring Budget. At this point, I will resist all urge to repeat the slightly geeky rant about the UK budget process from a previous piece on the Autumn Statement. As of this year, the Chancellor has scrapped the Autumn Statement, and moved what is normally a Spring Budget to later in the year.

Why? – because the Autumn Statement was never supposed to be the political set piece that it became under previous Chancellors. It was simply supposed to be a statement to Parliament on the state of the public finances – fulfilling the Government’s obligation to inform Parliament of the Office of Budget Responsibility’s forecasts. In reality, as with many things in politics, it turned into a second budget for wannabe Prime Ministers to court the front pages – an affront to good practice in public finance management.

We won’t mourn the modern day Autumn Statement, and I’m sure there were public administration professors everywhere having really boring parties to celebrate its death. However, this move does, in my view, raise a very interesting dynamic about Hammond’s agenda whilst in the Treasury – he has no aspiration to the Prime Minister. Unlike his predecessors, he has little to gain from short termism and playing politics around the cabinet table by buying allegiances at the expense of good government.

This dynamic is made further interesting by what the Government has trailed about the Budget this week. The key words and phrases are “resilience”, “reserves”, “gas in the tank” – but the word that sticks out above all is “productivity.” Economists across the country will be getting excited – well, as excited as an economist can get. Those of us with an interest in the economy will find this significant, and it’s worth briefly digressing to explain why.

Productivity refers to the bang we are getting for our buck, as it were. It’s a very important, but often forgotten, measure of success on the supply-side of the economy. The budget talk is often dominated by tax and spending – that’s where those precious column inches are. However, getting more output for our input creates economic growth, growth creates jobs, jobs bring wages and wages bring spending – all good things. Crucially, in the short to medium term, increased productivity can also bring about a downward pressure on prices – a key part of the living standards debate. Sounds like a great idea you say? The problem is that it’s a long game.

However, those excited economists will think talk of productivity is hugely significant at this particular point, as it will be a hugely important factor as the UK attempts to compete in the global market post-Brexit. Perhaps more importantly, we aren’t too hot at it. UK output per hour is joint 16th among countries in the Organisation for Economic Co-operation and Development (OECD), with an improvement of only 0.7% (17th on that same list) between 2007-2015.

The two key ingredients are capital investment i.e. infrastructure and research and development and human resource i.e. skills and training. We spend only about 1.7% of GDP, which is well below the OECD average let alone the top dogs, and our infrastructure rating is among the poorest in Europe. Martin Wolf points to a further interesting productivity problem in a recent Financial Times article – namely the huge divergence across the UK in terms of regional productivity, with London being about 60% higher than the worst performing region in Northern Ireland.

Among the productivity policies mooted for a showing in the budget is £500 million for investment in improving technical education, with a view to achieving parity of esteem between vocational and academic pathways for young people. Hammond’s focus on fixing this ageing ailment of the UK economy, combined with his significant research and development spending commitments in the Autumn Statement, of which we expect more tomorrow, are signs that his agenda will not be dictated by short-term thinking. Regardless of your political persuasion, this is to be welcomed.

However, that does not take away from the pressures of the here and now, notably the worsening state of the social care funding situation in England. The revised borrowing statistics mean that he could have up to around £12 billion extra to play with. He will be under significant pressure to do something in this regard, and he almost certainly will. Although the credit card analogy he used over the weekend to highlight the fact that we aren’t really talking about new money, rather less debt, in response to this point is hard to argue with i.e. just because your bank extends your credit card limit, doesn’t mean you should use it.

Other policy tweaks such as an increase in National Insurance for the self-employed to bring it into line with standard National Insurance have been floated, along with a potential hike in alcohol duty. Either way, there is a growing consensus that there will be no major changes to the big ticket taxes and shopping sprees at the expense of the public purse.

A further political battle ground will be the rumour that he has used the additional revenue from the revised borrowing figures and better than expected growth to add to the Brexit buffer fund he set up in the Autumn Statement – although the exact detail of this remains to be seen of course.

And what can we expect of Labour? Despite a difficult period, Labour has carved out a number of areas of strength on the economy. The social care crisis comes to mind as an area where they seem to be landing a few punches and declining wages despite economic growth (a sign that living standards have decreased), with some fresh new research from the Resolution Foundation, supports their declining living standards narrative. However, again the Shadow Chancellor is finding it difficult to really land his budget opposition lines without it all sounding a little “pie in the sky”, despite public support for the policy content itself.

Pundits are saying this will be a “batten down the hatches” budget from “Spreadsheet Phil”. It seems to have been slightly lost that this is not actually the first “Brexit Budget”, but rather the last “non-Brexit” budget. Perhaps a little battening down of the hatches for uncertain times ahead is no bad thing. Interestingly, all the sounds from the Treasury seem to suggest that despite the political chaos around Brexit, there is some longer term thinking going on in Number 11.

More significant is the indication that this Chancellor, liberated by his own lack of ambition for higher political office, is willing to forego the traditional headline grabbing strategies of his predecessors. He understands the need to address the longer term structural weaknesses in the supply-side of the economy, rather than tinkering with tax and spending which risks introducing further volatility or distortions in the economy during a period of profound political and economic uncertainty. Despite your political persuasion, you would be forgiven for thinking this is a welcome change in tact.

Tomorrow may not be particularly headline grabbing, but it will most certainly not be inaction.