finance

Without an economic plan, patriotism is Johnson’s last refuge


In his speech to the Conservative party conference on October 6, Boris Johnson promised that his government would take the country “towards a high wage, high skill, high productivity and yes, thereby low tax economy. That is what the people of this country need and deserve”. No doubt, this is what they would like. But can he deliver? It is extremely unlikely. If so, that will have consequences.

Hope is now being placed on the “Brexit dividend” of restricting immigration of low-skilled people. But delivering a high-wage, high-skill, high-productivity and yet high-employment economy in such a way is impossible. Even if we ignore the short-term disruptions visible today and look to the longer term, many other things would also have to change. Above all, businesses would have to invest more heavily in the skills of their workers and other capital.

At the very least, the longstanding dream of such an economy would require strongly supportive policy. The Autumn Budget and the Spending Review, to be delivered by Rishi Sunak, the chancellor of the exchequer, later this month will tell us whether such policies exist.

What might be the elements of such a plan? At a minimum, it would include full and generous funding of the government’s skills guarantee. It would also include a modification of the planned rise in the corporation tax rate, by retaining generous tax credits for investment. Finally, it would give local governments the resources and the powers (including fiscal powers) needed if they are to make a start on the vaunted “levelling up” agenda.

At present, no such coherent programme seems on the way. Indeed, a striking feature of the principal new taxes introduced is that the higher corporation tax will impose a heavier burden on investment and the additional national insurance charge will be a tax on jobs. Neither will drive a desirable transformation of the economy.

The chancellor’s hands are tied by forces beyond his control and decisions already made, such as those on these taxes. The fiscal legacy of Covid is crucial. Also important is the legacy of Brexit, not just for the labour market, but for other aspects of economic performance in reality, rather than the fantasies of the believers. Above all, there will be growing pressures for additional spending from the UK’s ageing population and climate commitments.

The Green Budget from the Institute for Fiscal Studies and Citi gives a thorough overview of where we are and might be going. While the recovery from the pandemic has been stronger than expected, it is now threatened by the risks of resurgence of the virus and by supply chain and labour market disruptions, other shortages, surging prices and so monetary and financial risks.

In the longer term, suggests Citi, the economy will also be hampered by weak trade performance. Trend growth, it suggests, will be a miserable 1.5 per cent a year, even lower than the Office for Budget Responsibility’s assumption of 1.7 per cent. Moreover, output levels may well remain far below the OBR’s pre-Covid trajectory.

Line chart of Index, 2019=100 showing UK productivity growth has been dire since the financial crisis

Despite a better-than-recently-expected picture today, the chancellor’s medium-term room is limited, if he really wishes to bring down the ratio of public debt to gross domestic product, especially if he also wants to cut taxes before the election.

There is also the risk of rises in interest rates. Since the Bank of England now owns 32 per cent of gilts, the consolidated government accounts are exposed to rises in short-term rates, not just long-term ones.

The upshot is that the health service will continue to gobble up money, the budgets of unprotected departments will be squeezed and some supposedly high-priority objectives will be starved of resources in the spending review, including even social care.

Chart showing the long-term trajectory for public debt is upwards; Illustrative long-term debt trajectories with and without cost pressures of ageing and the net zero transition (% of national income)

In short, the combination of immediate disruptions with weak longer-term growth and sustained fiscal pressures will not feel like the sunlit uplands the prime minister likes to promise.

Yet does this really matter? One used to think that economic performance was crucial to political success. Now we know there are alternative political tactics. If economic outcomes and fiscal largesse disappoint, Johnson can return to what has worked so well since 2016: the battle of undaunted Britain against the despotism of Brussels. Indeed, we are already seeing just this in his attempt to rewrite the agreement he reached over Northern Ireland just over two years ago.

In the last resort, blame what is wrong on foreigners. This has worked so far. But the patriotism card surely cannot work its magic forever.

martin.wolf@ft.com



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