Economy: Spring Statement Debate
Full Debate: Read Full DebateLord Skidelsky
Main Page: Lord Skidelsky (Crossbench - Life peer)Department Debates - View all Lord Skidelsky's debates with the Department for International Development
(6 years, 5 months ago)
Lords ChamberI am sorry to interrupt the noble Lord, but does he not remember that the debt-to-GDP ratio came down for all the years of Brown’s chancellorship until 2008?
Conveniently or not, I happen to have forgotten that. At all events, let me consider what the noble Lord has just said.
I am glad to see that the noble Lord, Lord Livermore, who had disappeared for a moment, is now back in his place, because what I really wanted to say is that although I did not agree with every single word he said, I very much agree with what he said in general. The Chancellor missed an opportunity to spell out how much more difficult his task had been made by implementing the results of the referendum.
In my view the referendum has produced a disastrous situation. Someone said at the time that people did not vote for a lower standard of living—but that is precisely what they voted for, and it is precisely what they are going to get. That is very deplorable indeed. I agree with the noble Lord who said that it would be helpful if the Chancellor had spelled out the fact that, because of the effect of that vote, we are facing even bigger problems than we otherwise would have done.
It is important that we should not go for a very hard Brexit. We had a debate yesterday about what was going to happen, and we had to reappraise the position. We were saying that we needed a meaningful vote on the result of the negotiations, and there was a long debate about that. Unfortunately, we did not have an opportunity to vote on the place we should start from. The trouble is that the Government started by saying that we are going to withdraw from the customs union and the single market. That will be dangerous and damaging. Parliament really must take a strong position and say that we cannot go along with the implications of Brexit if it means that the living standards of our people will be lower. I think that we have a duty to say that we will not go along with this.
Therefore, as it stands, it is a good Budget but it is a far less good Budget than it would have been if we had not been dealing with the initial implications of Brexit. The situation will certainly be better if we do not continue along that route but instead take a revised view on where the Government should stand on the single market and the customs union.
I add only one point, which was made yesterday, about the Irish border. If we do not leave the customs union, we do not have a problem, and if we do leave the customs union, we do not have a solution. That is the reality. However, overall I welcome the proposed changes to our financial proceedings and debates, and I believe that this is as good a Budget as one can produce in circumstances which are much worse than they would have been if we had not had the result that we did in the referendum.
My Lords, in his Spring Statement, the Chancellor saw,
“light at the end of the tunnel”.—[Official Report, Commons, 13/3/18; col. 718.]
The light is pretty dim, and the tunnel has been much too long. The two are connected, the dimness of the light being largely the result of the length of the tunnel, as I shall try to demonstrate.
First, I have a question about the light. Real GDP is expected to grow by an average of 1.4% a year for the next five years. This is just over half of the trend rate of growth before the crash. GDP per head is expected to grow by under 1% a year in that period. This is a picture of a stagnant, becalmed economy. In the 1950s and 1960s, Britain was often called the sick man of Europe because its annual growth rate was a miserable 2.8% a year. Now we are promised half of that as the new normal. Note that it is by no means the new normal for other countries. The United States is expected to grow by 2.2% over the next three years, the eurozone by 2% and the rest of the world by 3.7%. So our new normal is actually quite a lot worse than the expected new normal of most of our trading partners. The noble Lord, Lord O’Neill, asked whether this pessimistic estimate is credible; possibly not. I am not a great fan of five-year growth forecasts. But what I would say is that it has nothing to do with Brexit. As the OBR made very clear, these poor economic prospects that it sees are rooted in structural problems in the British economy, which have been there for quite a long time.
The OBR characterises the British problem as one of lack of supply, stating that the main indicator of this is,
“stagnation in productivity … since the financial crisis”.
I do not disagree with that, but what is lacking from the analysis is how a demand-side shock produced by the financial crash morphed into a supply-side problem. That is an interesting point of analysis which is underresearched. The explanation lies in the Government’s reliance on a market-led recovery. We now have a labour market that works pretty much as the classical theory tells us it should; that is, very flexibly and with a trade-off between wage growth and employment growth. With this kind of labour market, the economy rapidly returns to full employment, but it is a low-productivity level of full employment that leads inexorably to a low-productivity trap.
Output per hour worked grew by 2.3% between 1998 and 2008. Since the crash, it has grown by 0.3%. The fall in productivity growth would have been even greater had not hours worked fallen somewhat. The OBR has therefore said, rightly, that,
“a revival in productivity growth is essential”,
to sustain even the 1.4% annual growth of GDP.
This requires a return to the pre-crash level of investment. Public investment as a share of GDP has fallen from 5% in the 1960s and 1970s to roughly 3.5% today. Instead of compensating for the fall in private investment after 2008, George Osborne cut the state’s investment programme as part of his austerity Budgets. Low productivity is a direct consequence of the austerity policy.
We have now entered the Chancellor’s long tunnel and need to ask why it has been so long. This is the Chancellor on “responsible budgeting”:
“First you work out what you can afford. Then you decide what your priorities are. And then you allocate between them”.
This is absolutely fine, except that what you can afford is not independent of what you can do. If you can do nothing, there is an absolute limit to what you can afford, but that is not true of government. Government can raise taxes and increase its borrowing. The Treasury view, echoed by the Chancellor, is that such measures cannot bring about a net increase in government revenue because they reduce private sector activity by an equivalent amount. That is the real meaning of that little moral tale that the Chancellor has advanced.
This is exactly the same as the old Treasury view of the 1920s. For example, Winston Churchill when he was Chancellor of the Exchequer said in 1929 that,
“very little additional employment and no permanent employment can in fact and as a general rule be created by State borrowing and State expenditure”.
We thought that Keynes had demolished that doctrine, but it has returned with a vengeance. Since 2010, the Treasury and the OBR have been united in the view that there has been little or no spare capacity in the economy and therefore no scope for fiscal expansion. Rather, the only contribution fiscal policy could make to recovery was to cut the deficit. This would restore confidence and bring about a rapid bounce-back in private spending and investment. That was the doctrine; as far as I know, it still is. In fact, as the Minister says, the deficit has been coming down, but at a much slower rate than expected or forecast. And because austerity has lengthened the tunnel, it has postponed the solution of the budgetary problem.
Every competent authority agrees that the austerity policy lengthened the tunnel by two to three years and made the average household at least £5,000 poorer than it would have been. In doing this, it reduced the capacity of the economy to produce output.
Is there nothing fiscal policy can now do to raise the growth rate? Is it true that there is no spare supply in the economy? I should like to make two observations on that. The OBR estimates that unemployment, which is expected to stay at just over 4% over the next five years, is at an equilibrium rate. That is, that any expansion of fiscal policy now will simply lead to inflation, not produce any extra employment.
Is that true? I doubt it. I do not believe that headline unemployment figures are a true measure of spare capacity in the economy. I would question the idea that 4.4% unemployment represents the equilibrium rate of unemployment in this country, for two reasons. First, 4.4% is an average. It disguises the fact that there is overheating in some parts of the economy and underheating in others. In the south-east, unemployment is down to 3%; in the north-east, it is nearly 6%.
Secondly, and more importantly in my view, the 4.4% disguises the extent of underemployment—people working less than they want to. In 2016, the International Labour Office estimated that 6% of those in employment wanted to work longer hours than they were allowed to. In the United Kingdom, there are 32 million in employment, and 6% of that is 2 million. If we add this number to the headline unemployment figures, we get 3.4 million. That is an underemployment rate of 10.4%, not 4.4%. That seems to me a more accurate measure of the extent of spare capacity.
To conclude, I think there is more spare capacity in the economy than the OBR believes to be the case. If I were in charge of the Treasury—many noble Lords might say, thank goodness you are not—I would loosen fiscal policy, expecting to create a demand draught, and I would want monetary policy tightened to any extent needed to repress inflation. We have the spare capacity. What we lack is spare imagination.
Before the noble Lord sits down—I am certainly not one of those who turns white at the thought of him as Chancellor of the Exchequer—does he agree that it is not just a matter of people being underemployed? It is much more complex than that because some are very highly employed but their working conditions in this country are atrocious.
I completely agree. If you want to get a comprehensive view of what underemployment consists of, that would be a very important factor. I was just citing the most convenient measure we have, which is the measure of the International Labour Office: people who want to work more hours than they are allowed