This coming budget promises to offer nothing more than the same gimmicks the PM already announced at the most recent conference. A conference that she would probably rather forget, and would rather we forgot also.
There were a few policy announcements, if anybody remembers them from the conference rather than the letters falling off the stage behind her, the conference cold and some ‘comedian’. Policy announcements such as an unspecified amount put aside to deal with Brexit. However, there is no amount of money the government can put aside to mitigate against an unknown and to set a budget now will make things worse not better as the world tries to decipher what the amount means for a deal etc. So, I ask the chancellor to merely state that what will need to be done will be done to manage whatever deal we may or may not reach. After all the deal and the potential damage will only be realised in its entirely posthumously.
There was also the Energy price cap, originally proposed by Ed Miliband albeit in a very different way no market reforms or new providers or a large and sustained level of investment none of which seem to have followed the policy through to the Tory Conference promise. There was also the raising of some of the public sector pay cap being lifted for some civil servants and not every civil servant and even then only over time.
Firstly the politics of all of the above are dire. This does not seem like joined up thinking and so despite what positive words or whatever is left of the Tory machine by the budget, it is safe to say this is not what they were looking for. With the half-way house between changing tact and sticking to their previous positioning it is looking like they are playing politics and unsure on their own position, not voting on opposition day debates further underlines this. Meanwhile the posturing on policy from an economists perspective leaves little to cheer either. From the right they are meddling in forces they don’t understand. Price caps they themselves called Marxist, due to their belief that capping markets is a textbook problem, will likely be set too low and thus cause energy shortages. Alternatively, the behavioural economist’s perspective on the price cap is that of forcing up prices, after all it is rational for energy companies to increase prices now if there is a threat they can’t when they need to. Then there is the arguments from the left, that through all the years of austerity the only success is an ideological one. Furthermore, that the Tories have driven down the share of the economy that was government spending.
Economically this is a problem for the left because it is the part of the economy that remains stable during recessions and that provide the security of employment and a base level of demand which keeps the wheels turning. To briefly explain, GDP equates to the total income in the economy or as economists like to call this, the level of Aggregate demand (AD). AD consist of Consumption, Investment, Government spending (minus taxes) and Exports (minus imports). The fact the economy has not got smaller is because of the deficit, due to lower tax take and increased private borrowing of individuals for consumption.
Individual borrowing in a small and largely structured way is perfectly fine and healthy in an economy, such as with mortgages. However, depressed wages from 2008 onwards and low productivity which applies pressure to households spending and partly due to the availability of cheap money, borrowing has become more unstructured and more un-payable. The problem that is now becoming prevalent is that the borrowing by the individuals is not for productivity or for a long term purchase like a house but to buy white goods or sustain a standard of living by buying food. These people need help, yet the Bank of England just increased interest rates to stave off inflation, meaning the borrowing poor will again be asked to pay more through interest rates. Again with productivity near stagnant, wages have faced little upward pressure from the increased effectiveness or output of workers. This is in part due to the government’s spending decisions, cutting investment in schools and upskilling the labour force, scaling back on capital spending such as transport and infrastructure and depressing demand through lower government spending.
Here are my 3 basic demands for the budget.
1. Pay: ‘A happy worker is a good worker’
I urge the government to lift the minimum wage above inflation to the real living wage or higher. At a time such as now, with record low levels of unemployment this should make a significant difference to the level of consumption and should also lower unproductive and unstructured borrowing. I also urge the government to not be scared off by fear mongering, wage increases will also be matched by increased productivity and there is a real productivity crisis in the UK which will make the job of chancellor harder each year. As we see public sector wages fall below private sector wages it is also time to lift the cap on all public sector workers too. This will also avoid a brain drain on either the public or private labour forces. The knock on effect will be that overall wages and morale of those who staff them will increase. There may well be a small shift in employment as people get replaced by capital. However, this will ultimately be more productive going forward and other jobs will replace them, with the increase in spending there will also be more jobs to go around and capital purchases and investment will increase freeing up the large volumes of cash companies are sitting on. A more efficient allocation of workers benefits everyone, through lower prices over time, increased tax take, lowering the deficit and the need for benefits goes down and the amount of tax they pay increases and removes the notion of a poverty trap. After all the warped philosophy that you have to lower welfare to make people work can only go so far. It should be pushed that the prospect of paying a decent wage might work better without forcing people to borrow to eat, not least for the moral arguments over subsistence levels of welfare but that work should pay.
2. The politics of economic policy
My advice to Theresa May and Philip Hammond is stay away from gimmicks unless they want to be radical. If you’re of the age that you remember the Poll Tax you will remember that the policy failed due in a large part to the constant changes to the policy, just add this bit on, take this bit off etc until it become a tax policy that was nearly costing more than it raised and had to be scrapped. So when it comes to Help To Buy, Student loans, or energy market reform, be radical and scrap or completely rewrite the policy or step in full-throated or leave it alone. The give and take and the rigmarole of moving the boundaries on student loans does not help politically and the economics is also poor. They are going to kick the student debt pile down the road, which may well help some of those fortunate enough to earn above £21,000 to the tune of £300 a year give or take, but as the debt has been privatised, it carries a value and with each change to policy it risks making it a lost cause. My thoughts here are go big or go home, bring it in house and either write it off completely or freeze interest payments as a minimum.
3. Explore ways to make the economy prepared for the future
Not just Brexit, not just robots, not just climate change but everything. There needs to be large and prolonged resources poured into future proofing the economy. Alternative streams of income for people and the state. Alternative models of ownership should be explored. The process of the state owning shares in the UK firms could allow for income even after workers have been replaced, or in housing stocks to allow labour mobility and a different way of taxing property and ensuring housing standards. The future proofing against climate change could lead to micro and smarter grids with local communities providing the majority of their own energy and storage, transport or platform companies may be able to be operated differently.
This budget like the last could be a missed opportunity, or it could pave a way forward. For the country, possibly even the Conservative Party. But I will not be holding my breath…. Will you? For more posts like this keep an eye on @GenBorrowedTime on Twitter.