Ed Conway, Economics Editor
This week’s Budget is one of those moments when cool-headed logic about what the economy really needs right now runs smack bang into the middle of political expediency.
Let’s start with the economics.
Britain has some major overarching problems – ones that have been building up for years if not decades. Most pressingly, there is a serious productivity crisis.
For most of the past few decades, the amount of income we generate for every hour worked (that, after all, is what productivity is) has tended to increase at a rate of between 2% and 3% a year.
But since 2007, the productivity rate has been stuck well below that level.
Even taking into account a sudden bump in the third quarter, the annual productivity rate is still stuck at 0.6%.
Why does this matter?
Because, ultimately, productivity determines how much money gets left in our pockets. The reason this country has faced the biggest squeeze on real earnings since the Napoleonic era is because it has seen the weakest decade for productivity since the Napoleonic era.
Image: The UK has faced the biggest squeeze on real earnings since the Napoleonic era
So until productivity gets sorted, Britain will continue to languish in this feel-bad factor.
To add to the problem, weaker productivity and weaker earnings also means weaker tax revenues for the Exchequer and a bigger deficit, therefore, potentially, more austerity.
So what to do? The problem is there is no 140 character – or for that matter 280 character – answer.
For one thing, this is not a UK-specific issue: many other developed countries are facing similar slumps in productivity, though Britain’s plight is among the most severe.
There are plenty of standard responses: since you want to eliminate any excuse any business or individual has for doing work, you want to invest in infrastructure to help grease the wheels of capitalism.
Image: Better road and rail links can all help increase productivity
Build new roads and rail links so they can commute faster and go to business meetings quicker, so they can trade more cheaply with each other. Improve broadband so anyone can set up a business in their living room.
Invest in skills, so every potential entrepreneur can fulfil their potential. Pour money into research and development grants so that companies can innovate.
Or, on housing, build more homes and improve access to finance so people can easily move to where the jobs are. You get the idea.
The problem is that the Government has been trying to address all of the above for years.
There is nothing particularly new about the productivity crisis. Indeed, in a sense, every Budget for the past decade or so has been a productivity Budget.
The issue is not so much that the Government isn’t pressing the right buttons, but that it’s been pressing every button, and the machine simply isn’t responding.
It has attempted to encourage more apprenticeships through the apprenticeship levy. It has attempted to coerce councils to build more homes, it has pledged to build more roads and railways.
It has introduced massive tax breaks for investing in start-ups. It has followed pretty much every page in the textbook – and yet here we still are, deep in a productivity crisis.
The Government… has been pressing every button, and the machine simply isn’t responding
Ed Conway
In other words, when it comes to productivity, there are no easy buttons left for the Chancellor to press.
Faced with this issue, there are two options. The Chancellor could double down and throw even more money at the problem. For some, even some Conservatives, this is a tempting option.
A glance at the prevailing rates on UK Government debt shows that the benchmark 10-year bond interest rate is around 1.3% which is, if not the lowest ever, then not far off.
In other words, investors seem quite happy to lend to the Government at low interest rates – even though the deficit this year is higher than last year’s.
Moreover, the public finances are no longer in an utterly parlous place. This year the deficit will actually be a bit lower than was expected in the last Budget.
The Office for Budget Responsibility is expected to raise its forecast for future deficits, but precisely because productivity is so weak.
In other words, provided the Chancellor can frame any extra spending as a productivity boost, he can at least say there’s a chance, in the long run, that it might actually prove revenue neutral, or even positive.
Image: Housing starts have recently hit the highest level since the financial crisis
But there are a few problems. First, this is a leap into the dark.
As I say, there are no easy buttons left to press. It may be just as likely that the UK can boost productivity through small structural reforms rather than big marquee policies (for instance, trying to get more students to pursue apprenticeships than university degrees).
Moreover, it’s quite plausible that the UK has already pressed the relevant buttons and there is just a lag until we get the results.
Indeed, while many people are fixated on the notion that Britain doesn’t make enough homes, they have mostly missed the fact that, first off, it takes a long time to boost housebuilding, but that the number of new homes built has recently hit the highest level since the financial crisis.
While the UK did indeed build too few homes during the crisis years, it’s no longer obvious that housebuilding rates are too low – or at least that far below what they should be in the coming years.
Most importantly, there is a compelling argument that Britain might need to save a major chunk of that potential spending for the coming years, in case there is indeed a hard, disruptive Brexit.
Why spend an extra £10bn today when you may need it to, for instance, cut VAT or pump it into public services around March 2019?
So the economics probably argues in favour of caution at this Budget. And that would probably have been the Chancellor’s preference. He is a cautious character, who’d rather incline to a smaller state, lower taxes and a reduced deficit. He does not see himself as an economic crusader.
Image: Some believe it could be the Chancellor’s farewell Budget
But now consider the politics. The Conservative Party is facing its toughest few years in decades. The minority government may not survive for another year.
If the party is to regain the confidence of the nation, it may need a dramatic gesture to show it intends to instil fairness and equality across households and generations.
And given this may be its last Budget before an election (who knows these days?) perhaps this is the last chance for just such a gesture.
And then there’s the Chancellor’s own political position. At loggerheads with many of his Cabinet colleagues, under pressure from Number 10; some think Philip Hammond is unlikely to see out the end of the year.
In other words, many within his own party think this is Mr Hammond’s last chance to prove his worth.
Some would argue in favour of a big eye-catching Budget, full of measures to please everyone. Others would say it implies he should be ultra-cautious, for fear of making yet more mistakes of the kind he made in 2017’s first Budget, when he tried and failed to raise National Insurance for the self-employed.
In short, it makes for a complex, dangerous cocktail.
My suspicion is that as a result this Budget is unlikely to be the big epochal economic moment some expect it to be.
There will be big words and a powerful speech about evening out the gap between generations, between rich and poor.
There will be promises of more homes and maybe some forensic tax cuts (more cuts than rises certainly, and Mr Hammond has room for a bit of a giveaway). But this is unlikely to be the moment the Chancellor turns Britain’s economic system on its head.
Sky Views is a series of comment pieces by Sky News editors and correspondents, published every morning.
Previously on Sky Views: Paul Kelso – My Zimbabwe cricket trip turned to torture
Source: Sky