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The economy has been slowing, the labour market is on the turn and the monthly public finance figures suggest that borrowing is beginning to rise. I welcome this morning’s news that the Government have reached a withdrawal agreement with the European Union, and I have been encouraged by the recent rise in sterling on the prospect of that deal. It is a reminder of the virtuous circle of economic management. If the markets have confidence in the Government’s policy, the exchange rate strengthens. That in turn makes British citizens better off and instils further confidence. I hope that the Government will bear that in mind during the interminable trade negotiations which will dominate their time—and Parliament’s time—over the next decade.
I also welcome the statement in the gracious Speech that,
“the Government’s new economic plan will be underpinned by a responsible fiscal strategy, investing in economic growth while maintaining the sustainability of the public finances”.
I suspect that I am not the only person to play Queen’s Speech bingo. Words such as “plan”, “responsible”, “investing”, “growth” and “sustainability” are all reassuring, but I suspect that they have featured in many a Queen's Speech over the last 50 years. I know because I helped draft some of them. I hope that I will be forgiven for regarding them with a degree of scepticism.
It is best to judge economic policy by actions rather than words. The Government had an excellent inheritance. Thanks to the work of successive Chancellors in Alistair Darling—now the noble Lord, Lord Darling—George Osborne and Philip Hammond, the public finances were broadly back on track by the beginning of this year. Mr Hammond deserves particular credit. Whatever you think about the levels of taxation and spending, he presided over the Treasury at a difficult time. But he stuck to his task and last year’s deficit of £41 billion—a little less than 2% of national income—was a major achievement.
However, since he stood down the mood music has changed. One unfunded spending announcement has followed another. We had a mini-spending round last month and a Budget will take place next month. I feel for Treasury officials: you spend a decade putting things right and then, like Sisyphus, you see the rock falling down the hill as the Government pursue a policy of fiscal incontinence. I may be being unfair to the Chancellor; he may yet set out how the spending pledges will be paid for and how he can still meet Mr Hammond’s fiscal rules. Meanwhile, I would like to make four brief points that in my experience generally inform a successful economic strategy.
First, the Government need to recognise that when the public finances turn against you, they can deteriorate very quickly. That certainly happened in 1992; it happened again in 2009. It is a reminder that spending windfalls in the good times while borrowing to finance shortfalls never ends well. We will enter the next downturn, as and when it comes—and believe me, they always come in the end—with higher debt in relation to national income than in any previous downturn of my working life. I would advise the Government to be prudent. They should be building a contingency to guard against a downturn—or, to use a phrase much beloved by our last Prime Minister but one, we should mend the roof while the sun is shining.
I would also advise against dressing up a widening deficit as clever Keynesian demand management. There is a case for supporting demand through fiscal policy, but it should be from a much stronger position. The present problem that Britain faces is of supply rather than demand. Fiscal fine-tuning rarely works. As the noble Lord, Lord Lawson, said as far back as 1962:
“The Treasury has never done anything too soon ... its actions fall neatly into two categories, too little too late and too much too late”.
Secondly, the Government need to keep an eye on the longer term. It is in the next two decades that the long-foreseen ageing of the population will become all too apparent. As the independent OBR has made clear, even on unchanged policies the Government will face continued pressures on the NHS, on long-term care and on pensions. These spending pressures will take the form of current consumption. A sound fiscal policy requires consumption to be financed out of taxation rather than borrowing.
My third point is that the Government need to prioritise relentlessly. Last week, the ONS confirmed the dire state of British productivity. Output per hour has risen by just 2% since the last quarter of 2007—a trend reflected in stagnant living standards. Brexit is going to put further pressure on productivity, so it is more important than ever that the Government prioritise skills and infrastructure. If a Polish taxpayer is no longer going to pay for the skills of our workforce, we are going to have to pay for them ourselves. Similarly on infrastructure, the Government have made real progress in recent years in coming up with a national plan—but that still contains projects such as HS2, which deliver insufficient returns. Those projects with the highest economic returns must come first.
Finally, the Government need to create an environment conducive to trade and prosperity. That is partly about implementing a competition policy at least as rigorous as the European Union’s state aid regime. When I started at the Treasury some 35 years ago, the first paper which landed on my desk was entitled Lessons of DeLorean. It made bleak reading—so let us not prop up lame ducks or adopt protectionist procurement deals at the expense of the taxpayer.
We also need a sensible trade regime. Gladstonian liberalism has been fundamental to the success of the British economy. This is not the time to erect barriers with our closest trading partners. The Government cannot admit it now, but when the dust settles and the revolutionary fervour of the ERG burns itself out, I confidently predict that we will remain close to the single market and to the customs union—and that will be progress indeed.