The Chancellor declared in his Autumn Statement that Britain was on course for a budget surplus, growth and national recovery. Yet at the outset he had staked his credibility on removing the deficit within this Parliament. Not only has the government failed in this overarching goal, but the deficit is unlikely to be eliminated until the end of the next Parliament.
With growth being revised down for the next few years there is a strong likelihood tax revenues will continue to be lower than anticipated and so the chance of achieving surplus seems as far away as ever. Add to this the problems of multinationals not paying the right levels of corporation tax and a growing dependence on volatile stamp duty revenues, it is clear that raising revenue will continue to be challenging.
On the expenditure side, according to the Office of Budget Responsibility (OBR), not less than 60% of the identified cuts to public expenditure are still to come in 2015-20. And as pointed out by Paul Johnson (Institute of Fiscal Studies (IFS)), future cuts to departmental spending will be “colossal”, in effect amounting to the biggest squeeze on public spending since the Second World War. This arises to a great extent due to the Coalition’s decision to ring-fence a growing portion of public expenditure, with health, education, international development and the triple lock pension commitment included, leaving other departments to face even steeper cuts to achieve the surplus by 2019.
Taking a step back from the Treasury, we can see that the UK has a trade deficit of 5.2% of GDP, the worst of any G7 nation, and so we are still “living beyond our means”. Osborne’s budget was all about the “feel good” factor before May 2015, and so the icing on the cake was directed to more consumption rather than investment into productive assets for longer term growth. So while the changes to Stamp Duty are welcome in themselves, in the greater scheme this merely delays the urgent rebalancing of the British economy to productive investment.
As well as a trade deficit, the Government also has a budget deficit of 5%, and this when we supposedly have 3% growth in the economy. Surely we should be near or in surplus now to better withstand the inevitable downturn in the cycle. While the Chancellor has clearly revealed his short term political priority in this statement, it is clear that there are concerns about the UK’s continually poor productivity record, with our output per hour being around 20% below the G7 average.
There were some welcome measures announced which will contribute to this re-balancing, but they are too little, too late. Among these, were the £250 million for the Sir Henry Royce Institute for advanced materials science in Manchester and other northern cities, scrapping of employer NIC for firms taking on apprentices, help for first time SME exporters to reach out to emerging markets beyond Europe and the US, new reliefs for entrepreneurs when they sell their businesses and increased R&D tax relief for innovative SMEs.
These micro measures should help but they will be lost in the greater picture which is one of profound failure to tackle low productivity, an insufficient focus on skills development, and short term gimmicks which will simply worsen the unresolved mis-allocation of capital due to mal-investment, in turn supported by a hyperactive monetary policy.
Shadow Banking, the Big Elephant in the Room
Shadow banks can offer an alternative source of finance to conventional bank credit, and so can play a useful role in oiling the wheels of commerce. But they may also pose some serious systemic risks which could have profound outcomes to the global financial system. These entities have not been regulated in the same way as mainstream banking corporations, though recently the relevant regulatory bodies such as the Financial Stability Board and Basel Committee on Banking Supervision have introduced new measures to address shortfalls in risk management (Basel III). Why are shadow banks so important? At $75 trillion, shadow banks are roughly equivalent to annual global GDP, in other words, official global GDP is only half the total global output.
Commonwealth Delusion Threatens Britain’s Future in Europe
A narrative which has gained some currency in recent months is that Britain would have a more stable economic future if we left the European Union and re-established old associations with the Commonwealth. Among the chief protagonists of this view is the UKIP, emboldened by some recent by-election successes and offering a 1950’s atavistic world view as solutions to the challenges of a rapidly changing 21st century world, where regional alliances are in flux and geopolitical events place a hefty premium on established networks. Clark Barrett reflects on why Nigel Farage’s prescription for tomorrow’s Britain is plainly wrong.
Raising Aspiration in Coast and Country
With one in every six children still in relative poverty, as progressives we cannot rest until Britain becomes a less unequal society. While there has been significant success in addressing lack of social mobility in metropolitan areas, it is not clear that progress has been made in the peripheral regions. While great teachers can act as mentors and catalysts for aspiration, there is more that professionals can do to address this shortfall. Alex McKerrow argues that professionals in the UK regions need to take a lead and offer quality schemes to give local disadvantaged children the opportunity to aim higher.
Focus on Actual Energy Needs to Achieve Real Social Change
We need to make sure we are not wasting energy we don’t need, but also to make sure the appliances we do use are the most efficient. This is a win-win combination, and goes beyond the mere payment of an allowance. Even making winter fuel payments means tested is to miss the bigger picture, because however much government provides financially, the real solution lies in a proper identification of actual social need through smarter usage, better materials and design, argues Josh Robson.