Budget Resolutions and Economic Situation

Debate between Geraint Davies and George Kerevan

Tuesday 22nd March 2016 Commons Chamber

[George Kerevan]

I cannot accept that. There is a tension in the Chancellor’s mind. It is like good and evil sitting on either shoulder. One side is telling him to run a budget surplus, because that is an easy road to take. That is not badly thought out. Given the number of rules that Chancellors have thought up over the years and then failed to implement, running a budget surplus is an extremely simple rule. It is just too crude, however. That argument vies with the supply-side strategy.

Following on from the question from the hon. Member for Wycombe (Mr Baker), another friend from the Treasury Select Committee, let us look at what the Office for Budget Responsibility says in its report about how the Budget supply-side measures will work. It states:

“We also expect smaller positive contributions to potential output growth over the next five years from population growth, while average hours worked are expected to trend down over time.”

With a decrease in average hours, in input and in population growth, where is the productivity increase going to come from? I should like to hear the answer from the Chancellor.

[Geraint Davies]

Does the hon. Gentleman agree that we have such hopeless productivity growth because, first, our research and development is very low, by international standards, and secondly, so is infrastructure investment? Thirdly, the rights and security of people in work are now low, making it easier for them to be sacked. In Germany, where people can stay in work, employers have to invest in their productivity because they cannot get rid of them. Here, however, we are destroying rights and creating short-term, low-paid jobs, which is resulting in lower productivity.

[George Kerevan]

I could not agree more with all three points, so I will just accept them.

The Red Book also shows that public sector net investment—capital investment in the public sector—is set to fall for the next four years. I have to ask Conservative Members this question. With industry in trouble and manufacturing contracting, as it has done in the past quarter, how will it help productivity if we have to cut public sector net investment in the capital side of the economy in order for the Chancellor to meet his rendezvous with destiny in 2020 and have his budget surplus? We need investment in capital in order to have productivity—that is where it comes from.

It is interesting to see what the OBR thinks we will have to do in order to get the books to balance. It believes that UK private sector business investment will have to make up the difference. It believes that private business investment will come to the rescue and contribute a quarter of the expenditure contribution to GDP growth in the period to 2020 in order to achieve the Chancellor’s fabled budget surplus. So, to make all the sums work, there has to be growth. Where is the growth coming from? According to the OBR, a quarter of all the potential expenditure in the economy between now and 2020 has to come from business investment. [Interruption.] Bear with me as I go through the numbers, because they are important. According to the OBR, business will have to contribute 0.6 percentage points each year to GDP in order for the economy to grow sufficiently to deliver the taxes to enable the Chancellor’s budget to come into balance.

There is only one problem. Historically, from 1990 to 2008—that is, throughout the boom period—the level of investment that British business managed to achieve as a percentage of GDP annually was 0.3, which is precisely half what the OBR thinks that business will have to invest between now and 2020 if the Chancellor’s numbers are to work. That is not going to happen.