The shape of things to come or mere months to something different?

Significant economic challenges will face whichever party wins the next general election regardless of when it is held, says Professor Jamie Morgan, Y-PERN Academic Lead for Leeds Beckett University.

The last general election took place in December 2019, and government must call another one within five years or Parliament is automatically dissolved, and the latest that can happen is 17 December 2024, which means the latest an election can be held is the end of January 2025.  Given that current polls suggest that the government may lose that election, one might wonder what the point is of detailed assessment of their economic plans going forward. That said, various aspects of the Chancellor’s Autumn Statement warrant comment, and this is mainly in order to highlight what it is not. Significant economic challenges will face whichever party wins the next general election regardless of when it is held.

Consider the context, the UK has a cost-of-living crisis, a public and private debt crisis, a housing availability and affordability crisis, low levels of investment, failing infrastructure, degenerating public services and welfare system, rising poverty and massive wealth inequality and entrenched income inequality (exacerbated by chronically low social mobility). This situation is unevenly distributed around the country and has slowly unfolded over several decades, punctuated by some major events – a global financial crisis, a pandemic, a period of sharp inflation etc – and entwined with a looming climate emergency that demands urgent attention in the form of fundamental changes in the organization of every aspect of life, in order to preserve life.

If we refer to the recent Autumn Statement, it essentially takes the form of giving and taking with different hands – the net effect of which is taking – combined with a few inducements which seem to occur in the context of lack of capacity and based on the assumption of magical effects in the private sector. According to the IFS its underlying implications are massive and likely undeliverable real term cuts in spending for unprotected departments, inviting comparison with austerity. However, this is not to say that all of the initiatives are daft, merely that many do not meet needs. If we take just two of the Statement’s major components.

First, tax cuts as largesse are mainly illusory thanks to ‘fiscal drag’, and while national insurance changes may be welcome to some they do not help the most vulnerable, and the vulnerable are treated through other policy changes as they have always been treated, as drains on resources wallowing on welfare (who can be ‘helped’ to find meaningful employment via immiseration and threat in the form of ‘the Back to Work Plan’).

Second, ‘full expensing’ may well induce real investment but if standard accounting applies and incentives are as the government assumes them to be then this is offset by higher corporation tax over the long term (though arguably recent governments have done little that indicates they understand the real relationships between taxation and behaviour and the context in which both are operational). 

Much of the rest of the Statement seems like a hesitant industrial strategy by stealth – further development of investment zones, planning reform combined with incentivisation, measures and targets to deal with the National Grid connection backlog in order to hasten electrification and targeted financial support to attract investment in strategic manufacturing, as well as some help for small businesses in the form of business rates discounts and so on…

In other times these changes might be welcome, but their impact today is more in the form of minor mitigations of long term direction of travel. Going forward, however, perhaps the thing that matters most here is the way in which the scope of government and the purpose of policy is framed, since ultimately this must change if a new government is to have any hope of approaching things differently. The government has two self-imposed fiscal rules (underlying debt as a % of GDP must be falling in the final year of forecast, public sector borrowing must be below 3% of GDP) and aims to restrict public spending to lower than growth in the economy. Ostensibly this seems like prudence, via reducing liabilities and demanding efficiency savings and productivity growth and if that was all that was entailed then it would be difficult to object. But consider where we are and consider what this presupposes.

The underlying assumption is that the public sector is parasitic on the private, that the private sector is the source of economic dynamism and growth and that (given where we are) the current level of the public sector is either too big or about what it should be (since it should not be bigger). This sits awkwardly with automatic stabilisers, the value in ownership of public assets, the scope for multipliers based on investment and so on and is odd in the extreme when one considers the devastation that has been wreaked on public services and the parlous state of everyday infrastructure.

It is also curious that government likes to roll out the Laffer theorem as a means to justify tax cuts (they pay for themselves, and when they don’t we just have to cut services, sorry), but rarely if ever draws attention to the fact that public investment can be a good and that it too ‘pays for itself’ in numerous ways – not all of which are directly connected in a simple cost-benefit sense. As government sentiment this, of course, is ideology not reality. Behind it sit choices about what is valued and who counts and on what basis, and behind this are the cumulative consequences of structural change that cannot be distilled into a single Autumn Statement (or Spring Budget) with its media rituals of running the numbers to see who gains and who loses this time around.

The more telling aspect of the Autumn Statement has been one of obvious continuity of commitment– and that is a language of ‘supply-side’ reform. But remember what this implies – it is regulation and red tape (‘inefficiency’) that holds back pent-up energy that could dynamize our economy and fix its many problems (compared to the ‘dead hand’ of the state). If this is so, then surely the government of the last decade and more has had something to do with the creation of those impediments, but in reality the claim is simplistic and one-sided.

Moreover, experience suggests what passes for ‘supply-side’ warrants some scepticism regarding what is likely to follow: wishful thinking about massive levels of private investment coming to the rescue – and it seems the government has something like this in mind in terms of tapping pension funds and other similar initiatives and I close with this. If the result is another round of creeping ‘financialisation’, extracting rents for little real return, then we may live to regret this – as we have over water and sewerage and the railways (and as we ought to over private equity’s growing and mainly hidden role in dentistry and many other services). 

These challenges are not unique to the current UK government. If Labour wins the next election, it is in an unenviable position of either persuading the electorate that we need to think about the role of the state differently or opting for the safer slow failure of positioning itself as a competent alternative Conservative government. If it does the latter, then it will also be unable to adequately address climate emergency since this now requires massive government financing (and this requires creative approaches not simple denial) and, as such, will fail not only current generations but future ones. 

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