The 1956 Suez crisis was the moment Britain had to wake up to the fact that it was no longer the force it once was. The November 2017 budget was its economic equivalent.
Forget the extra money to paper over the cracks in the NHS. Leave to one side the willingness to throw money at sorting out universal credit. The real story was not the latest attempt to boost home ownership but the news from the Office for Budget Responsibility on the state of the economy. This was little short of calamitous.
For the past 100 years and more the UK has gradually got a bit better at doing things. New machines have been introduced. Workers have become more skilled. More has been produced with less effort and as a result living standards have risen steadily.
Until the financial crisis, this improvement in productivity averaged 2% a year, with periods of stronger growth in the 1950s and 1960s balancing out the bad times, such as the 1920s and early 1930s.
The OBR, the government’s independent forecasting body, says this long-term trend has been broken. Britain can no longer expect productivity growth of around 2% a year; instead it will have to make do with around 1% a year. Before the financial crisis, the UK was at or near the top of the G7 league table; now it is at the bottom. Inevitable consequences flow from this. Slower growth means individuals and companies pay less tax. Unless public spending is cut, that means the government has to borrow more.It is now more than 10 years since the start of the financial crisis and the OBR’s gloomy outlook marks the moment when Britain has to stop kidding itself. Growth is not going to return to its pre-crash levels. The 21% gap between output per hour now and where it would have been had it remained on its pre-2007 path is never going to be closed. Britain is substantially and permanently poorer.
According to Philip Hammond, there is nothing to worry about. Britain is alive with innovation and is at the cutting edge of the coming fourth industrial revolution. Churchillian rhetoric of the “blood, sweat and tears” type is not really Hammond’s style, even though on this occasion it would have been merited because the economy is now going to be £49bn smaller at the end of the current parliament than previously envisaged. The chancellor’s message, rather, was to keep calm and carry on.
The best that can be said for Hammond is that he didn’t make a bad situation worse. He could have responded to the OBR’s gloomier forecasts by hunkering down, by imposing fresh public spending cuts or raising taxes. Instead, he has done the opposite. He has decided to increase spending and borrowing to see the economy through what is expected to be a rocky period when the UK leaves the EU in 2019. In its own modest way, the budget adhered to Keynesian principles. There will be an extra £2.7bn of borrowing in 2018-19 and a rather more substantial £9.2bn in 2019-20, when Britain will be leaving the EU.
It certainly makes sense for the government to be leaning against the wind at a time when the private sector is inevitably going to be wary of investing, especially since the chancellor can do so by once again pushing back the date by which Britain’s public finances will be back in the black. In the dim and distant days of 2010, George Osborne promised he could get on top of the UK’s budget deficit in one five-year parliamentary term. That soon became two parliaments and now, it would appear, the earliest date for budget balance will be the middle of the next decade. Osborne’s notion that he could cut the economy back to growth has been tested to destruction over the past seven years. Britain has ended up with slower growth, weaker productivity, stubbornly high borrowing, a doubling of debt and growth that is still over-dependent on personal debt.
The good news is that Hammond has effectively called time on the age of austerity. The bad news is that his drip-feed of new money is not nearly enough to compensate for previously announced Whitehall spending cuts, the benefits freeze and the fall in real incomes caused by the cost of living running ahead of inflation.
Listening to Hammond, the impression was of a real giveaway budget of the sort that Nigel Lawson delivered in 1988. He hit most of the politically sensitive targets by providing emergency help for the NHS, freezing fuel duties, addressing the universal credit debacle and abolishing stamp duty for first-time home buyers.
With the exception of the stamp duty change, which will only push up house prices and place them further out of the reach of young people, there were reasons to welcome most of what Hammond announced. Business liked the help he announced on business rates and, given that the budget was all about preparing Britain for technological change, the increased generosity of the research and development tax credit made sense.
But the money has been spread thin as a closer investigation of the Treasury’s red book – which costs the various budget measures – makes clear. The NHS has not received as much as it needs to meet ever-increasing demand; nor was the extra investment in housing nearly as generous as it sounded. The £300m for universal credit next year is tiny when set in the context of a £2tn economy.
Hammond thinks his supply side measures will help to revive productivity growth. There are some analysts who think the OBR is being too negative and that there are already signs that productivity is picking up.
The alternative view is that Britain has had one recession a decade since the 1970s and sooner or later will have another serious downturn. It is about to go through the Brexit process with the economy in poor shape. From that perspective, this budget needed to put Britain on a war footing in order to win what will inevitably be a long battle to raise productivity. And it didn’t.