Rishi Sunak, Chancellor of the Exchequer, prefaced his budget and spending review saying the UK has “an economy fit for a new era of optimism”. Yet the only unambiguous piece of good news is a faster than expected recovery from the Covid-induced recession. Even that relief is limited by post-Covid and post-Brexit disruptions, especially high inflation.
“With the growth of wages and real incomes which should stop next year”, according to the Resolution Foundation think tank, recovery may soon appear to be over. But an even greater concern is whether government policy justifies any optimism about the long-term economic outlook.
The truth, alas, is that the UK economy has long been mired in poor growth. Paul Johnson of the Institute for Fiscal Studies noted that if pre-financial crisis trends continued, real average gross incomes would be around 40 percent higher than they are now. According to the Resolution Foundation, this was “the weakest decade for wage growth since the 1930s.”
Such a long period of weak productivity growth, real earnings, and real disposable income made voters cranky. It was even a big part of the reason for Brexit. But low growth also makes all policy options painful: with slow income growth and strong pressure for increased spending on health, social protection and pensions, either taxes must rise as a proportion of national income or the rest of government spending is ruthlessly squeezed.
The best answer must be faster growth, but which must also be consistent with climate commitments. What is most striking about the Chancellor’s speech is the lack of an integrated response to these challenges.
So what was missing? One of the failures has been to show how the growth strategy, taxation and ambitious climate goals fit together. Instead of bragging about another year of gasoline tax freeze, for example, the Chancellor should have announced a plan to introduce a carbon tax at a steadily increasing rate, combined with a pledge to shift the revenues. to households. This would have created the price signals that businesses and households need and a corresponding determination to protect them from the cost.
A closely related failure was to indicate how the much higher rate of investment the economy will need to accelerate growth and climate change mitigation, especially in the private sector, is to be motivated and financed.
A commitment to an increase in the carbon tax would contribute to motivation. But just as important would have been to commit to a corporate tax credit for all investments in the year they are made.
This could be combined with a higher overall corporate tax rate. The tax would then fall more heavily on companies that do not invest. In his speech, Sunak said his “super deduction” (a version of this idea) “makes our corporate investment tax system a true global leader, taking us from 30th in the OECD to 1st. And, worth £ 25 billion over the two years it’s in place, it will be the biggest corporate tax cut in modern British history. But why has it been in place for only two years? Will this solve the long-standing problem of low business investment in the UK? Barely.
Then there is the challenge of providing the venture capital for investment. A crucial question here is the role and structure of UK pension funds. As they are currently constituted and regulated, these are too fragmented and invested with far too cautiousness. A change in pension regulations, including a consolidation of funds, as well as a move towards “collective defined contribution” schemes, should be part of a radical pension reform.
Yet another challenge is where the savings will come from to finance the higher rate of investment the country will need. The UK is already running very large current account deficits. So should the country risk becoming even more dependent on foreign capital, or should there be significantly higher domestic savings rates in the longer run? If the latter is to be a political goal, how can the greatest savings actually be achieved?
There are many other challenges if the UK is to achieve faster growth, while embarking on an ambitious green transition. Is the government spending enough for excellent scientific research? Will education and skills be adequately funded? Will level-up ambitions lead to something real and lasting?
The Budget and Expenditure Review provided an opportunity to present the government’s thinking on how it intends to resolve these long-standing and undoubtedly daunting challenges. This made it an important moment for the government, the country and the economy. What was offered fell short of the occasion. Sunak may be optimistic. I, alas, no.
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