Economic commentators don’t agree on much, but in one area last week they found common ground: that the next Government will inherit a mess.
They agreed the Budget had kicked problems down the line. Paul Johnson, head of the Institute for Fiscal Studies (IFS), went further. There was a ‘conspiracy of silence’ between Chancellor Jeremy Hunt and his shadow Rachel Reeves about the tough choices on spending and taxation in the years ahead. It was the worst fiscal outlook for 80 years.
Really? There are problems, with the tax take heading for the highest level of GDP since the late 1940s and pressure on public services. But while the IFS sets the gold standard for independent fiscal analysis, there is a decent chance this time that it – and the rest of the economic community – will be proved wrong.
It’s a case of Four Weddings And A Funeral. There is a big issue to be tackled, but four areas of strength that make our fiscal problems more manageable.
Let’s get the funeral out of the way. It’s productivity. The Chancellor said public sector productivity was lower than before the pandemic. Actually, it is lower than it was in 1997. It fell steadily until 2010, only to climb until the pandemic, by which time it had recovered the lost ground and climbed ahead. Then it collapsed and has yet to fully bounce back.
Four Weddings And A Funeral: There is a big issue to be tackled, but four areas of strength make our fiscal problems more manageable
This is not to get at Government employees, and remember that in some services you don’t want higher productivity. Bigger class sizes in schools are not great. But there is a productivity issue in the economy as a whole and a particular one in public services. The next Government must clear the blockages that have hobbled the private sector, and make the areas over which it has direct control much more efficient. Taxpayers rightly demand better value for their money.
Now for the weddings. There is a gradual appreciation outside the UK that a corner has been turned. Both the pound and gilts had their best week this year.
Inward investment has boomed, as Hunt and Kemi Badenoch, the Business Secretary, have pointed out. You no longer hear foreign companies with plants here banging on about the cost of Brexit.
There was a piece a few days ago on Bloomberg – no enthusiast for UK economic policies – titled ‘Britain isn’t such a basket case any more, at least to investors’.
Its chief UK economist, Dan Hanson, thinks growth this year could reach 1.9 per cent if optimism leads households to spend excess savings. I think there is a decent chance it will happen.
There is a downside, in that UK assets are being snapped up on the cheap, with private equity firms sniffing opportunities that investors in public markets have failed to appreciate. It’s right to worry about this, but at last British pension funds are being bounced into thinking more about putting money into UK equities.
That leads to wedding number two. We need more investment of all sorts if the economy is to grow faster, and pension fund disclosure requirements are one way to ensure UK savings stay here.
This is something we’ve called for and it’s a relief to see movement. If you were to ask pension savers where they want their cash invested they would surely be appalled to learn that funds have only 2.7 per cent in UK equities. All this is on top of the impact of a British Isa, to the benefit of savers and the economy alike.
Wedding three is our strength in the service sector, as reported on the previous page. There is a big push-back against globalisation insofar as it manifests itself in physical trade, but less so in services. The UK is second only to the US as an exporter of services and that position is likely to grow through this decade.
The final wedding is artificial intelligence. This is the start of something big, and it can boost efficiency in service industries. In fact, I think it is the Holy Grail the world economy has been waiting for. Again, it’s particularly helpful for the UK.
So, yes, a huge fiscal problem, but also a pathway to fix it. You can see the bottle as half full, as well as half empty.
