Autumn Statement

Lord Desai Excerpts

Thursday 4th December 2014 Lords Chamber

[Lord Desai (Lab)]

My Lords, we seem to have achieved the best of all possible worlds: a Conservative Chancellor was determined to eliminate the budget deficit in one Parliament and has achieved his predecessor’s idea of halving the budget deficit in one Parliament—so a Conservative Chancellor has achieved a Labour goal. We must welcome this but obviously it will take another Parliament to eliminate the rest of the deficit because life is never easy when you are Chancellor of the Exchequer.

In what little time I have, let me try to make sense of what is going on in the economy. As your Lordships may see, economics is very difficult because not only is it impossible to forecast, it is not even possible to tell what happened in the recent past. We have been told that our income was higher than we thought it was and that we had no double-dip recession—indeed, we had more or less continuous growth over the last five years. That is one fact. We also know that while employment has grown, wages have not kept up with prices and that therefore we face a problem with average real earnings. As my noble friend Lord Haskel pointed out, we also have a productivity problem.

The way to understand these things is, first, that the upgrade in national income was due mainly to things that are not visible in the economy. They are mainly abstract goods and services: this is not the old-fashioned idea of productivity, with a person working in a factory producing something physical. Our idea of productivity is very old-fashioned and the economy is moving away from that, so more or less when we talk about productivity we are really measuring only wages. In the public sector, the wage defines the product—but when you shift people from the public to the private sector, they get a lower wage because private sector wages are lower than public sector wages. Also, only a portion of the output counts as the productivity of the worker because there is a value added, which goes to profit.

So, first, the shift from public sector to private sector will lower productivity as calculated; whether a person is less productive or not does not really matter. Secondly, we have growth, thanks to IT, of jobs that are no longer contributing in any skilled way to output because a lot of what one would call the lower clerical jobs in retailing and elsewhere have now been replaced by IT. What people are doing is something further down the scale, in which productivity is bound to be low because there is not much work being done that involves skills.

These compositional effects of national income mean that we may be stuck with low productivity growth for some time to come: while income growth will happen, productivity growth will not. The first phase of this happened when a lot of manufacturing moved away from the UK and went to Asia. Manufacturing jobs declined, people went into services and productivity growth stopped. We will have a persistent problem of the tax receipts never matching up to the growth numbers—and if that happens, we will have to rethink how we are going to achieve the elimination of the deficit in the next five years. That is the bad news, as it were, but the bad news does not stop there. As far as one can see with what the world is going through, it is not just the UK but the eurozone, in particular, and the rest of the developed world. We used to call the other ones emerging economies. They have emerged and we are submerging, so the submerging developed economies are going to be in a low-growth, low-inflation environment for the next 10 or 15 years, as far as one can tell.

If that is going to happen in one of those long cycles, whoever is the Chancellor is going to have to come to terms with the fact that growth will be low. Maybe our growth will be higher than the world’s growth rate but it is not going to be 3% or 3.5%; it will be 2% or 2.5%. Given that, the budgets are going to be very tight, and even after we eliminate the deficit, there will be no room for any parties. As Crosland said many years ago, “The party’s over”. I think that the party will continue to be over.