The UK’s challenges around productivity, regional disparities and the transition to net zero emissions are complex and interconnected, made even more so by the coronavirus outbreak and Brexit. Anna Valero argues that while the pledges made in the Budget will help provide additional resources, there remains uncertainty over how things will evolve in a number of key areas.
The Chancellor began by setting out the government’s response to the coronavirus outbreak with a £12bn fiscal stimulus focused on protecting health and livelihoods (adding to this an extra £18bn of other spending pledges next year). In terms of health, the promises that the NHS will get whatever it needs to cope ‘whether it’s millions of pounds or billions of pounds’ are reassuring, but against the background of the NHS funding crisis, these might not be enough to alleviate short-term pressures due to staff shortages or a lack of beds. The measures for workers and businesses attempt to keep negative economic effects to the short term and prevent permanent scarring through unemployment, business closures and associated loss in productive capacity. Overall, this seems like a comprehensive response which should help businesses weather the storm, though there is uncertainty over how things will evolve.
The Chancellor then went onto his plans for achieving ‘future prosperity’ including the ‘levelling up’ agenda, in what represented a wholesale departure from the austerity pursued by his predecessors. Collectively, the announcements represent an additional £175bn over five years, in a package which the Office for Budget Responsibility (OBR) has described as the ‘largest planned sustained giveaway at any fiscal event’ in nearly 30 years, and one which it expects to have a positive impact on GDP. There will now be sustained increases in current spending for the first time in a decade, and public sector net investment will rise to 3% of GDP by 2022.
Investment for growth
Increased investment in productive assets including infrastructure, innovation and skills is urgently needed, and has been for some time. UK productivity growth has been particularly poor since the financial crisis and real wages have only just recovered to pre-crisis levels. While GDP has continued to grow over this period, this has largely been driven by increases in employment, the composition of which has deteriorated with a rise in the share of low wage, poor quality jobs. The OBR estimates that uncertainty since the EU referendum in 2016 has already created a hit to potential output of 2% (mostly due to depressed investment), and even before accounting for impacts of the coronavirus outbreak it has downgraded its growth forecasts for 2020 from 1.4% to 1.1%. Particularly sobering are the ONS figures released on budget day that show growth over the three months to January 2020 was a precise zero. The outlook is now worsened by the current coronavirus shock and the UK faces continued uncertainty over the form Brexit will ultimately take (a topic that was largely ignored in the Chancellor’s speech).
The giveaway is to be financed largely through increased borrowing, together with some tax rises (though not income tax, national insurance or VAT given the triple lock pledged in the election manifesto). There have long been calls to increase borrowing for productive investment in what appears to be a prolonged low interest rate environment – but borrowing for current spending is not sustainable and debt levels are already high by historical standards. While it appears that this programme is to be delivered within current fiscal rules, the Chancellor announced that these are to be reviewed and decisions made over any changes this Autumn. There are risks that if expected growth does not materialise, the government might have to pursue more contractionary policies in the future, or let debt rise further.
A sustainable growth strategy?
This budget has kickstarted a process, and we expect more details in a number of areas over the coming months with the publication of the National Infrastructure Strategy, Net Zero Review and the Spending Review. A key challenge will be to ensure that these funds are spent so that socio-economic benefits are maximised and that new infrastructure projects are consistent with the UK’s commitment to achieving net zero greenhouse gas emissions by 2050. Moreover, dealing with the persistent and growing regional disparities will require more than infrastructure investment – building local skills and institutional capacity will be crucial here.
‘Protecting the environment’ was described somewhat in isolation rather than as part of a coherent and comprehensive sustainable growth strategy. To achieve this, it is necessary that incentives created by government policies are aligned across the board for sustainable, productivity-enhancing investments and innovation. The need for this is urgent given the global climate crisis, the UK’s commitment to net zero, and the associated opportunity to build leadership in this area as the government hosts COP26 later this year. Our recent report sets out a series of policy measures that could be implemented at this critical moment, delivering the step change that is required to achieve strong and sustainable growth in the UK. A number of announced investments, including in Carbon Capture and Storage and electric vehicle charging infrastructure are welcome, but challenges around domestic heating were not mentioned, and the continued fuel duty freeze (even in light of falling oil prices) is not consistent with aligning incentives for the transition to zero carbon vehicles or reducing air pollution in our cities. Likewise, the largescale road building programme would induce rather than deter road traffic.
Innovation and human capital are key for improving the UK’s productivity record, remaining on the frontier of technological change as a knowledge economy, for achieving net zero emissions and capturing the associated economic opportunities it brings. The largescale increase in publicly financed R&D is particularly welcome, as are increases to R&D tax credits to stimulate more private sector innovation. However, there was not much new on skills, apart from increased capital investment in further education colleges and some specific programmes in schools. More needs to be done to improve labour market outcomes and resilience for those from disadvantaged backgrounds, and further incentives for employers to train their existing workforce should also be explored.
The UK’s current challenges around productivity, regional disparities and the transition to net zero are complex and interconnected, made even more so by the coronavirus outbreak and continued uncertainty over the UK’s new trading relationships with the EU and rest of the world. Moving the economy onto a sustainable and inclusive growth path is an ongoing process and while this budget will help ‘get things done’ by providing additional resource, it will be crucial that investment decisions are evidence-based and incentives created by policies that are aligned.
Anna Valero is ESRC Innovation Fellow at the LSE’s Centre for Economic Performance.
All articles posted on this blog give the views of the author(s), and not the position of LSE British Politics and Policy, nor of the London School of Economics and Political Science. Featured image credit: M. B. M. on Unsplash.