In his ambition to move Britain towards a ‘new settlement of responsibility and prosperity’, George Osborne has set himself an impossible task.
The last five years have been a masterful contortion act, bending the UK economy into a position no one thought possible. Austerity reigned, yet so too did growth. There was no second recession, the deficit has been halved, and we are enjoying record employment. Osborne’s Mansion House speech previewed the contortion yet to come: greater productivity, national saving, investment and competition. Yet to his second act, the Chancellor has added the straight jacket of his new surplus rule and with it, a greater degree of impossibility.
The ambition is the right one, and in isolation its constituent parts are important in taking us towards a more prosperous future. Greater competition is important to restore faith in the market system and to free capitalism to deliver on its potential to bring economic prosperity. Productivity is a key driver of wage growth and living standards. If Britain is to be globally competitive, we need to close the productivity gap between us and our peers. Surplus too matters for Britain. With national debt over 80% of GDP, the cost in both foregone growth and interest payments threatens economic prosperity.
Yet throw them together and the outcome is not necessarily prosperity. A prudent state is not necessarily a productive one. By tying himself to a surplus rule, the Chancellor threatens the very success of his prosperity project.
The problem is that the UK’s lacklustre productivity requires investment. In its pre-election briefing the LSE Centre for Economics argued that our low productivity was in part a result of low investment in infrastructure and innovation. Osborne’s recipe for prosperity requires a surplus for saving and repayment, but it also demands space in the public finances to make the investments needed to improve productivity. When we have budgetary pressures from health, education, and pensions, plus promises on tax cuts, the requirement to run a surplus leaves very little space for investment.
So how can the Chancellor become a contortionist come escapologist? Delivering prosperity from within the constraints of his surplus rule?
The answer comes from asset sales, but not simply those announced in the Mansion House speech. Far more ambition is needed. The remaining Royal Mail stake is already earmarked to pay down a tiny part of the debt. RBS is a more sizeable capital release, even if we do not recover the full £45bn that we put in. Even so, it is equivalent to one year of interest charges on our national debt and might just fund HS2 at its lower £43bn estimate. On the IEA’s more likely cost projections, we would be lucky if it paid for half. We’d have half a railway, but we still wouldn’t have paid off any debt or saved for a rainy day.
A more ambitious programme of asset sales is required, one that not only seeks to drive productivity nationally, but that is capable of improving prosperity in innovative and localised ways in every corner of the country. For that, Osborne must turn to his Australian counterpart, Joe Hockey. The Australian Asset Recycling Scheme aims to release capital tied up in national and state assets. As an incentive, the Treasury pays states 15% of the sale price of an asset (a fund currently capped at $5bn) provided the proceeds are invested in new productivity enhancing assets. These are the key infrastructure projects that have been identified as essential to drive growth and jobs in the short to medium term, but also productivity in the long term. Simply, it is recycling an unproductive or less productive asset into a more productive one. Projects earmarked for investment through the scheme include road and rail projects, schools, and hospitals.
The potential of this sort of scheme in the UK is significant and largely underdeveloped. As the TPA recently highlighted, local authorities are sitting on significant assets. Swindon Borough Council is a relatively small unitary authority but its property assets alone amount to £1bn. Even if you take council housing out of the equation, that still leaves a sizeable £600m of capital tied up in assets. Some are productive, many are not.
The alternative could be significant for local economic growth and the prosperity of local citizens. Some are obvious: Swindon recently sold a derelict college which has been transformed into a bustling complex of restaurants, retail, and leisure, bringing growth and jobs. Some are less so. The town is now fundraising for a radiotherapy unit to avoid a 70 mile round trip to Oxford. Apart from the obvious output loss, the journey has health and wellbeing implications. All three matter for prosperity, we see this in the Legatum Prosperity Index. The cost of the project is a mere 0.5% of the £600m Swindon has in non-housing assets. This could easily be funded by asset recycling in the Australian mould.
Asset recycling doesn’t simply have to encourage productivity through infrastructure either, it could be used by councils to drive local innovation and enterprise through business rate flexibility. Proceeds would cover the short term revenue gap but ultimately driving higher rates revenues in the medium to long term. Nor does it have to exist within local authority boundaries. The economic benefits of Western Access to Heathrow was cited by a number of councils including Swindon in their support of the scheme. With a multitude of councils set to benefit, asset recycling at a local authority level could have provided a significant contribution towards its £500m cost.
An initial asset recycling fund could be financed by the sale of the first tranche of RBS shares, releasing capital many times its value. Then the Chancellor can have his surplus, and the necessary investment we need to improve productivity. Not only that, we get investment in every corner of the country, in assets and ideas that can drive prosperity not just from the centre, but locally too. That truly would be a new settlement for the future of British prosperity.