An Economic Audit
The budget is in just 5 weeks and after the Conservative Party’s disappointing election result in June, there will be added pressure for the Government to pull ‘a rabbit out of the hat’ (as George Osborne so loved to perform).
It is important though to abstract ourselves from the political cycle and get a proper idea of where the economy is at the moment. Whilst Jeremy Corbyn and the wider Labour party talk of gross inequality and the progressive remainers talking of impending doom with Britain out of the European Union, anyone would think the British economy is in a bad state of health. However, this is not true and in fact, Britain is a wealthier and more equitable place than it was 8 years ago as we emerged from a recession.
UK GDP quarterly growth has average more than half a percent between 2010 and 2015. That is higher than the average rate of quarterly growth over the entire decade from 2000 to 2010.
Much criticism has been made over the level of Government spending in the UK economy. It is true that the Government has cut the budget. However the cut is just 3% in real terms, and TME (total managed expenditure) today is at the same level it was in 2008/09.
Despite cuts to Government spending, both absolute poverty levels and inequality levels are falling in the UK. In 2015, 7.3% of the UK (4.6m)were in a state of persistent poverty (relatively poor in the current year and 2 of the last 3 years). This is a high number, and a huge human cost, however the figure has fallen since 2008, when it was 9%. Inequality is also falling at a significant rate after stagnating for two decades, and is now at it’s lowest point since the late 80s.
How has this been the case. Well ultimately the economy has been growing, allowing for increased job take up. There are now approximately 3m more jobs in the UK economy than in late 2009. Whilst many feel that wages have stagnated since the recession, and on aggregate they have, the incomes of the poorest have done marginally better than the incomes in the squeezed middle and those of the richest.
The incomes of those at the bottom of the income scale have performed better than expected due to policy interventions such as the National Living Wage and increasing the income tax threshold. Without these interventions, more needs to be done to support high rates of productivity in the UK, and specifically among those with low skill levels and low wages. This was raised in the recent report on UK productivity produced by the CSJ, The Great British Breakthrough.
Lastly, the business sector in the UK continues to thrive. Tax revenues are historically high despite tax rates being reduced under the coalition Government. The corporate sector has largely benefited from a strong global economy, low interest rates and a strong stock market. However, going forward, more must be done to support the business sector invest in both human and physical capital in the UK.
The UK economy is in good health, but of course more needs to be done. The rate of productivity growth has completely stagnated. And as the CSJ’s paper argues, the responsibility for this must lie with the productive sector (e.g. business sector). More investment in skills, advanced technology, innovation and better terms of employment for low paid staff, will help push productivity growth higher. Only then will the wages at the bottom of the earnings scale will improve in the long term.
