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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The writer, an FT contributing editor, is chief executive of the Royal Society of Arts and former chief economist at the Bank of England
Serious times call for serious measures. This week, UK chancellor Jeremy Hunt — a serious politician — delivered a serious Budget. It consolidated work done to stabilise the public finances after he took up the role in 2022 at the height of the turmoil caused by the Truss-Kwarteng “mini” Budget. The bond market shrugged, rather than swooned, as Hunt’s Budget was announced.
The reward for this stewardship was clear in this week’s projections from the Office for Budget Responsibility. Having stalled for almost two years, economic growth is expected to pick up modestly this year and next. Having fallen sharply, real household incomes are set to rise this year and next. And having ratcheted, government deficits and debts are expected to edge down over a five-year horizon.
Offered that as a forward contract 15 months ago, I think most would have taken it. Alongside a fall in inflation to below its 2 per cent target in the next couple of months, these projections add a degree more plausibility to the government’s claim that their economic plan is working. They also add a degree more credibility to their political claim that an incoming opposition party would risk wrecking this newfound stability.
Yet the key pre-Budget question remained essentially unanswered. Given their weak starting point, is a gentle recovery in the nation’s finances and growth prospects good enough, economically and politically? In serious times, were these serious macroeconomic measures?
Budgets are typically theatrical occasions when chancellors downplay expectations, then exceed them on the day. From top hats, empty days earlier, white rabbits appear. Hunt followed the first part of the script, but not the second. This Budget had a smaller batch of bunnies than any I can remember.
To assess whether they shifted the macroeconomic dial, apply a simple test. If any measure costs less than, say, £2bn-£3bn a year — roughly 0.1 per cent of annual UK gross domestic product — it could not plausibly do so. On that basis, only the 2 percentage point reduction in national insurance contributions and, potentially, the new public sector productivity plan make the cut.
Yet even on the OBR’s projections, the fruits of these measures are modest. The combined 4 percentage point reduction in NICs, taking the Budget and earlier Autumn Statement together, are estimated by the OBR to draw a further 200,000 people back into the workforce and add 0.4 per cent to GDP — a decent growth dividend. Yet on closer inspection the likely boost is far smaller.
First, the rise in the overall tax burden offsets these incentive effects, leaving overall employment little changed, according to the OBR. Second, these estimates assume a high marginal tax elasticity of labour supply. Many of the UK’s 8mn inactive workers cannot work for reasons of poor health and skills. Hunt’s Budget did nothing to lower these structural barriers.
Public sector productivity appears to have fallen in a number of Whitehall departments during Covid and has languished over a much longer period. It is ripe for a refresh, including through enhanced use of digital and AI. Moreover, every percentage point gain in public sector productivity translates into higher levels of public service provision than the, on the face of it, highly implausible 1 per cent a year on average rises pencilled in for after the election.
But can the government deliver productivity gains of as much as 2 per cent on this timeline? The record of productivity-enhancing IT systems in government — anyone remember Royal Mail? — is poor. And for every productivity gain that fails to materialise, the government’s spending projections after the election become an even more make-believe work of “fiscal fiction”.
On the OBR’s projections, GDP per head and real household incomes will both be 1 per cent or more lower at the end of this parliament than at the beginning. The tax burden as a fraction of the economy will be 3 percentage points higher. The dial marked growth, unmoved by the Budget, will continue signalling near stasis.
The Budget measures were macroeconomic marginalia for a simple reason: Hunt’s self-imposed fiscal straitjacket. Falling paths for deficits and debts sound prudent. But in the investment-starved UK economy, fiscal rules that fail to protect investment damage the economy’s medium-term health and, with it, the public finances. The current fiscal rules are self-defeating on their own terms.
These rules meant investment to boost the UK’s growth potential went unrewarded this week: housing, where the UK builds half the houses it needs; public investment, where the UK is towards the bottom of international league tables; local government spending, where councils are going bust; and skills and apprenticeships, where a majority of businesses suffer shortages. These are the engines of the economy. None fired this week.
We should be grateful for the small mercy of stability. But small mercies will not repair the nation’s depleted finances and the government’s disastrous poll ratings. This was a Budget without own goals, but was still a no-score draw. The hunt for UK growth remains just that. This is the height of fiscal folly.