Spring Statement — House of Lords, 2019-03-20
Topic: Macroeconomics
Jitesh Gadhia (Non-Affiliated, Unknown): My Lords, Napoleon once said, "I do not want a good general, I want a lucky one". The same logic surely applies to Chancellors and their stewardship of the economy. Faced with headwinds in the global economy and a downturn in business investment from Brexit uncertainty, the Spring Statement could easily have been a more testing experience for Mr Hammond. Instead, the Chancellor has continued to enjoy buoyant tax receipts, despite softening economic growth, enabling him to stay well within the Government’s fiscal targets and providing further headroom going into the next spending review The economy has maintained record employment levels and is expected to generate sustained real wage growth, especially from higher-income earners, providing what has been described as "tax-rich economic growth". However, I note that my noble friend Lord Macpherson cast doubt on these tax projections based on his long experience at the Treasury The Chancellor is also lucky because he has been able to sidestep taking tough decisions while Brexit negotiations are ongoing. He is quite right to retain as much dry powder as possible to respond to the different scenarios, but at some point soon the difficult choices will need to be made and the pressures to spend more will become irresistible Having reduced the deficit from almost 10% of GDP at the beginning of this decade to barely 1% now; with debt to GDP declining to well below 80%; and with the debt service ratio helpfully remaining steady at around 2% of GDP, the temptation to loosen the purse strings will seduce even the most prudent of Chancellors. Hence the 2019 Spring Statement probably contains the best set of fiscal projections we will see from the UK Government for a long time Having harvested his good fortune and preserved his optionality, what should the Chancellor and Government do next to maximise the UK economy’s potential? As with much else in our country right now, the answer depends partly on the Brexit outcome. Until today’s latest developments, it appeared that the risk of a disorderly exit had been mitigated by last week’s votes in the House of Commons rejecting no deal and seeking an extension to Article 50. That is certainly what the strengthening value of sterling indicated at the time. It now looks like the Prime Minister is backsliding on her position—along with the value of the pound—so we remain in Brexit limbo. Faced with this continued uncertainty, our only option is to try to look through Brexit and ask what is required for the economy to prosper, regardless of the final outcome I would like to highlight four priorities covering points of economic policy as well as philosophy. The first is something we should not do, namely to go on a spending splurge. Restoring our fiscal credibility has been hard won, and retaining sufficient fiscal flexibility is an essential part of the macro-policy armoury. A long-standing member of the Bank of England’s Financial Policy Committee, Richard Sharp, set out this case very lucidly in a speech he delivered in November 2017 titled, "It pays to be paranoid: the importance of fiscal space", in which he argued that, "a highly indebted government has less capacity to react to crises: we cannot assume that further shocks do not materialise; and, evidence demonstrates that fiscal space is a vital national resource to have available to counteract such a shock. Reducing fiscal space, therefore, means financial stability is harder to achieve" We should take heed of this wise counsel, especially at a time when history shows us that another crisis is overdue Secondly, we need to re-articulate the importance of wealth creation. Some might view this as a strange and unnecessary point to highlight: surely the merits of expanding the size of the pie are self-evident. Yet whenever I travel around the world and come back to the UK, I cannot help but observe that British politics is focusing either on the zero-sum game of redistribution or reconciling itself to below-trend growth of 1% to 1.5% We simply cannot meet the British people’s aspirations for higher living standards and better public services without raising our sights and becoming much more ambitious about promoting prosperity. We should not be content with mediocrity and need to guard against reacquiring the British disease that became a leitmotif of this country’s stagnation in the 1970s. If the United States, an economy more than seven times the size of our own, can still grow at 3%—adding the equivalent of Sweden in a single year—then we must and can do better This leads me to my third and most important point: at the heart of rediscovering the art of wealth creation must be addressing our productivity gap. We need to fix the fundamentals which have left our nation’s productivity around 20 per cent lower than the trend it followed before the financial crisis To the Chancellor’s credit, boosting productivity has been the key underlying mission guiding many of his priorities and decisions during the last six fiscal events that he has presided over. This year’s Spring Statement contains welcome measures to underpin investment in infrastructure and housing—representing the biggest public capital investment programme for 40 years—and the funding of several new science and technology projects spanning photonics, bioinformatics, supercomputers and nuclear fusion. All these support the Government’s ambition to raise R&D investment to 2.4% of GDP by 2027. We should also welcome the exemption of PhD-level roles from the visa cap, although I hope that this will not be undermined by restrictive rules applied to the family members of such applicants While these and other measures are all welcome, Andy Haldane, chief economist at the Bank of England and chair of the Industrial Strategy Council, recently made the following important observation: "The raw ingredients of improved productivity—skills, experience, infrastructure, investment—take time to build. The time lag between sowing the seeds of structural policy and harvesting its fruit in higher productivity and pay is measured in decades not months or even years" With our normal political cycle overlaid by polarised politics, there is an urgent need to forge a new political consensus on the basics of enhancing productivity. Such an approach would allow us to stay the course and provide longevity for the strategy without chopping and changing course every few years. For example, we now have a 10-year plan for the NHS. As Robert Halfon MP asked in the other place last week, why can we not have a 10-year plan for schools and education? We cannot solve our intractable productivity puzzle without anchoring the solutions in long-term thinking My fourth and final point is about our engagement with the rest of the world. As the HSBC economist Stephen King reminded us in an article earlier this week: "Westminster is not the centre of the world—and Brexit is not the only topic of conversation. There is a world beyond our borders" That world is changing fast and we are off the pitch. People the world over are looking at us agog with bemusement and bewilderment as we chase our tails on Brexit. We should not underestimate the opportunity cost of the current impasse I started by quoting Napoleon’s remarks about lucky generals. He also had some wise words about decision-making, saying: "Nothing is more difficult, and therefore more precious, than to be able to decide" It is something that I hope the House of Commons can reflect upon. To govern is to choose. If we fail to take timely decisions now about Brexit it will hold back the economic aspirations and prospects for our country for much longer than necessary and, potentially, with irreversible consequences.