Most Budgets are all about the rabbits in the hat. This one was all about the elephant in the room.
That elephant being, of course, the socking great productivity downgrade inflicted upon Philip Hammond by the Office for Budget Responsibility.
The key sentences came in what the Chancellor called, with a jab at his colleague Michael Gove, “the bit with the long, economicky words”.
“Regrettably,” he announced with considerable understatement, “our productivity performance continues to disappoint.
“The OBR has assumed at each of the last 16 fiscal events that productivity growth would return to its pre-crisis trend of about 2 per cent a year, but it has remained stubbornly flat.
“So today they revise down the outlook for productivity growth, business investment, and GDP growth across the forecast period.
“The OBR now expects to see GDP grow 1.5 per cent in 2017, 1.4 per cent in 2018, 1.3 in both 2019 and 2020, before picking back up to 1.5, and finally 1.6% in 2022.”
And there it sat, for the remainder of the speech – the one minute that cost as much as the rest put together, if not more.
Even as Hammond was talking up the enormous potential of the technological revolution, or doling out the usual bits of cash for this or that minor project, you sensed it looming behind him. Permanently lower growth. A hammer blow to the public finances. An economy that will, by 2020, be some £65 billion smaller than we assumed as recently as March.
The reasons for this are simple. As Daniel Mahoney pointed out in a prophetic economic briefing for the Centre for Policy Studies, our recent growth has been down to rising employment compensating for slack productivity. But with most of the eligible workers employed, there’s little scope for that to continue. The result is that poor productivity will, from now on, feed directly into lower GDP. Stagnant is the new normal.
You have to feel some sympathy for Hammond. This isn’t his fault. As the reference to “the last 16 fiscal events” made clear, it’s not even George Osborne’s fault. It seems to be built into the structure of the British economy. As for the causes, you can take your pick. Our firms don’t invest enough. They’re often quite badly managed. The housing crisis means people can’t afford to live in the most productive parts of the country (i.e. London). The City and North Sea oil, two of the more productive sectors of the economy, have had a tough time of it recently. More positively, we’ve been very good at creating jobs, even if they’re low-skilled and low-paid, whereas our continental rivals have kept their productivity figures pristine via endemic unemployment.
So it’s not Fiscal Phil’s fault. But it is his misfortune is to be the man who was there when the music stopped. And it lent all his talk about how marvellously the economy was doing a slightly plaintive air. Labour want to talk the British economy down, he said. Hold on, you felt like saying. Didn’t you read your own speech?
Given the constraints he was under, Hammond actually made a fairly decent fist of it. There was the inevitable blizzard of interventionist micro-announcements (I sometimes feel like there should be an £100 million threshold for anything mentioned in the Budget, to deter this doling out of lollipops to special interests – including, to the disgruntlement of many in the Chamber, the TUC).
There were the usual father-of-the-bride-speech jokes – the quality had improved on the Chancellor’s party conference speech, if only to the extent that I didn’t find myself longing for the sweet release of death every time another one-liner loomed into view like a Star Destroyer over Tatooine.
Where he did spend serious money, it was mostly well-judged. The decision to help those who find themselves waiting for too long for their Universal Credit payments was both right and welcome – as was the broader defence of the principles of the programme as a whole. The NHS does need the extra cash (although it needs reform even more). Businesses will welcome the decision to link their rates to CPI rather than the higher RPI from 2018, two years ahead of schedule. And the owners of small companies will welcome the decision to keep VAT thresholds where they are – especially after the last budget.
It was, of course, disappointing that the bulk of this extra spending will go straight on to the deficit, rather than being paid for by savings elsewhere – with the exception of a rather optimistic line item predicting billions in extra income from anti-tax-evasion measures.
But it is a sign both of Hammond’s relative prudence, and the sheer scale of the productivity problem, that all of his spending put together has exactly the same impact as that one tweak to the OBR’s assumptions for 2019-20 – each adding roughly £9 billion to the deficit – and far more in the years to come.
And for all its safety-first sensibleness, it is hard not to think of this Budget as a missed opportunity.
For one thing, the key announcements on housing amounted to an assault on the symptoms rather than the causes. Others have addressed this elsewhere on CapX, but unless the Chancellor’s review of planning in the cities comes back with some very radical recommendations indeed, he simply will not be able to build the houses he needs.
The insistence on “continuing the strong protection of our green belt”, in particular, represents a continuing debilitating surrender to the NIMBYs – though it is reportedly the Prime Minister, rather than the Chancellor, who has insisted upon it. The abolition of stamp duty for first-time buyers may, as the OBR unhelpfully points out, actually increase prices. And it was notable that Hammond simply reaffirmed the existing, inflation-focused, remit of the Bank of England by rote, rather than pushing it to take greater account of the asset price boom created by its monetary policies, one of the underappreciated factors behind sky-rocketing property prices.
Similarly, for a Budget dominated by productivity, there was little sign of a serious assault on the problem. Yes, some of the things the Chancellor announced may help around the edges, as will the extra R&D spending announced earlier this week. Productivity will also surely increase as the labour market tightens. But as Daniel Mahoney says, there are all kinds of things that could be done to improve matters – not least improved tax reliefs on capital investment, or a wide range of supply-side reforms. As for a full-on, tax-cutting, enterprise-boosting, damn-the-torpedoes Budget to put Labour on the back foot? Well, a man can dream.
Overall, what is true for doctors is also true for Chancellors: the first and most important rule is to do no harm. Credit to Philip Hammond for following that precept today. It’s just a shame that the OBR statisticians had done the real damage already.