As expected, the prime minister used Thursday’s speech on the economy to rebuff calls for more action from both the left and the right. Neither unfunded tax cuts nor more debt-financed public expenditure seem to be on the cards for the budget in a couple of week’s time.
This is to be applauded. While tax cuts would be welcome for business, entrepreneurs and employees across the country, restricting spending is an essential precursor to any significant action on tax. Likewise, those calling for more spending now risk putting short-term politics ahead of the long-term prospects of the UK economy, and the challenge in tackling structural problems that we face.
In this respect, the prime minister rightly focussed on setting the conditions for strong growth in the UK economy in the medium- and long-term. Recent research from HSBC shows that by 2050, nations we describe as “emerging” will have overtaken the developed world as a share of global GDP, making up 19 of the largest 30 economies. Almost 3 billion people in these countries will reach middle-class levels of consumption, opening vast new consumer markets. Our current exposure to even the largest of these countries is still tiny. For example, though China is the UK’s biggest export market outside the US and the EU, it remains a tiny share of the total at around 3%. For these reasons, it is essential that our growth strategy is focussed on ensuring that we make the most of these opportunities, and continue to attract investment in the UK from across the globe. Bickering over preliminary estimates of the UK’s quarterly GDP and whether to spend a little more now or not is a distraction in the face of such dramatic changes in the global economy.
However, this does not mean that there is not more that the government could do now. Earnings across the country are struggling, and simultaneous rises in the costs of living mean living standards are falling. This requires action, for both political and economic reasons. The prime minister highlighted several key areas, but in each of them, more action than currently planned will be needed.
Housing is a key area in particular, because of the large strain that housing costs put on living standards and the billions of pounds the government spends each year in supporting low-income families to just put a roof over their heads. Most people will agree that we need to build more houses. Building more good quality homes would ease pressure on living standards and provide a vital boost to the construction industry. Financing a £6bn-a-year programme of social housing construction through the sale of expensive vacant social properties worth more than the regional average, would give the government an employment and growth policy that has no impact on the public finances.
Another area is employment outside the south-east. While growth in jobs has been relatively strong in the north of the country in recent months, there is still a large employment deficit. Tackling this will take strong action over a significant period of time. Again, there is a cost-neutral way of starting this process. Recent Policy Exchange estimates suggest that public sector pay and pension packages are some £6.3bn higher than equivalents in the private sector. Tackling the national pay bargaining system and setting public pay locally could free up this money to invest in infrastructure initiatives and job creation in the areas of the country hardest hit by the recession.
These are just two areas where radical reforms are needed to tackle significant structural problems in the UK economy. Pushing through these reforms will take political strength, but will be essential to ensure that the government can continue along the right fiscal track.