As Britain grapples with a cost of living crisis amid a sustained period of flat growth, questions about past government policy, particularly fiscal policy and its current impact are being asked once more.
A comment by former Treasury Secretary Nicholas MacPherson on BBC Radio 4 has garnered some attention on social media.
Ben Chu, Economics Editor for BBC Newsnight honed in on MacPherson’s admission that “in hindsight, we probably should have taken advantage of (negative or near-zero interest rates in the 2010s) and borrowed more when times were more stable” to invest in public infrastructure and education.
The point was further illustrated by Jagjit Chadha, Director of the National Institute of Economic and Social Research (NIESR) who said that “the average UK household is £10,000 a year worse off than it would have been if growth had continued after 2007-08 as it had for the last 60 years”.
As he went on to explain, that represents incomes of 15 to 20 per cent lower than if the positive predicted trajectory had continued. Whilst some may point out that a financial crisis has a way of stymieing growth, commentators are pointing out that the UK’s lack of focus on long-term investment in infrastructure and up-skilling has led to some of these problems.
Indeed, commentators are pointing out that, at the time, the government did not heed calls from many quarters, including the IMF, discouraging George Osbourne’s dramatic austerity measures.
Diane Coyle, Professor of Public Policy at Cambridge University contextualised the current cost of living crisis in historical terms. As she put it: “For 250 years, the economy has generally grown and successive generations have been better off; but we have not had that for 10 or 15 years.”
The challenges are many. Coyle emphasised that growth in the UK is uneven – London and the Southeast are doing “pretty well” by international standards, but growth in the rest of the country is “extraordinarily poor”.
Sheffield, Manchester and Birmingham are doing “staggeringly” badly relative to similar-sized cities in France and Germany. Part of the reason is that residential areas in those cities, where housing is prevalent, are not well-connected to commercial centres.
Indeed, as mayors in the North of England protest against the government’s recent scaling back of HS2, it seems that Britain’s policies are still suffering from much of the same problems that MacPherson alluded to, during David Cameron’s tenure.
The difference now, of course, is that rates are rising and the cost of living crisis is becoming more acute.
As Chadha explained, crucial public investment, such as in education and infrastructure, has been low over the past decade and a half. Whilst this may have reduced public spending in the short term, it brings down output even more in the long term, as education and infrastructure are prerequisites for growth. For instance, reduced spending has led to creaking school estates, which have been in the headlines recently.
A number of commentators blame part of the problem on the short-termism of successive governments.
As Coyle put it: “One of the key distinctive features of the UK is it is such a volatile policy environment.”
She said that “governments are asking companies to make investment decisions that will have a 20 to 30-year horizon” but policy changes are alarmingly frequent.
For instance, corporation tax has been chopped and changed in Britain myriad times – slashed after 2010, up to almost the original a couple of years ago, unannounced in last year’s mini-budget, reannounced soon after, and implemented earlier this year.
Again, a recent development in the form of an appeal from business leaders to the Chancellor, Jeremy Hunt, urging him to make permanent the “full expensing” tax break, comes to mind.
Under the measure, currently only valid for three financial years, from 2023 to 2026, businesses that invest in IT equipment and machinery will be able to claim back the cost by writing it off against tax on their profits.
Going back to MacPherson’s rather revealing admission regarding the failure of Cameron and Osborne’s austerity policy, commentators were swift to point out that the government was advised by many quarters to change course at the time.
In 2013, then-Business Secretary, the Lib Dems’ Vince Cable, wrote in the New Statesman saying that the “danger of slow growth may now be greater than the loss of market confidence through increased borrowing”.
A 2013 IMF report on the UK economy said that when “labour is under-utilised and funding costs are cheap, the net returns” to public investment are very high. In other words, public investment at the time would have been a “no-brainer”, as Professor John Van Reenen at the London School of Economics, said at the time.
Simon Wren-Lewis of Oxford University wrote in the Financial Times in 2012: “By continuing along the same course, George Osborne risks making the average UK citizen thousands of pounds poorer.”
That has, unfortunately, come to pass. At the same time, given how Britain is lagging in productivity compared to its peers, his words on public spending were also prophetic. He stated: “The additional £5 billion in public investment should have been £25 billion, funded by a combination of borrowing and higher taxes.”
With the UK on the cusp of a change in government, is there a lesson for the average voter in all of this?
MacPherson said: “Governments are under immense pressure to deliver now – uprating the triple lock for the basic state pension, upping NHS wages – especially with approaching elections, governments are very focussed on core voters. So voters and governments are both short-term in thinking.”
However, the host of the programme, Paul Johnson of the Institute of Fiscal Studies (IFS), was quick to point out that much of the policy inconsistency has not to do with voters.
He also concurred: “We are constantly looking for quick fixes – like with Truss’s mini-budget – nurturing the economy is (a process) over a 20-year horizon – instead of policies looking to next month! Governments can make a difference, but over the long term, not immediately.”
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