The Chancellor glossed over terrible forecasts, delivered more hype than substance on industrial strategy, and succumbed to another housing market stimulus. But the Osbornomics bag of budget tricks is delivering diminishing returns for the British economy
Philip Hammond lacks the showmanship of George Osborne, but his latest budget taught us, if nothing else, that he is a great deal funnier. The best humour comes from humility, of course, and Hammond cannot afford to be anything but humble at the moment.
Indeed, the best gags were aimed squarely at his Cabinet colleagues, mocking both Theresa May’s disastrous party conference speech, and Michael Gove’s rather pathetic pitch recently for Hammond’s job as Chancellor. Osborne, so desperate to succeed David Cameron as Prime Minister, would never have dared. Hammond’s delivery was that of a man who knows his career has already peaked.
In every substantive regard, however, this was classic Osbornomics. George Osborne budgets generally had three key characteristics: terrible economic forecasts (used to justify more austerity), bits of money for supporting innovation in high-value industries (accompanied by overblown rhetoric), and a housing market stimulus (invariably justified, duplicitously, as support for young people trying to get onto the housing ladder).
Hammond’s budget ticked every box. The British economy continues to under-perform against the government’s expectations. Most alarmingly, growth has been revised down sharply, to the extent that the Office for Budget Responsibility (OBR) now acknowledges that assuming a return to a long-run growth rate of 2 per cent in the forecast period is no longer plausible. Sure enough, Hammond used this news to legitimise his own commitment to austerity (a bit of extra cash for the NHS and Universal Credit notwithstanding).
The reasons for this recognition of a slower growth equilibrium is the repeated failure to improve the UK economy’s productivity, which itself is due to a repeated failure to induce a higher rate of business investment. Accordingly, the OBR, which has consistently over-egged the productivity uptick just around the corner, revised down their forecasts for both.
Experience is finally trumping (pseudo-)theory. As Martin Wolf pointed out in the Financial Times, the OBR had been expecting, as late as March 2016, private investment to make a sizeable contribution to a healthy growth rate for the subsequent fiscal year. In practice, it represented a significantly smaller contribution, to a much less healthy growth performance. A smaller piece of a smaller pie. (The chart below is taken from the Wolf piece.)
Some of the resources that Hammond does have at his disposal were focused on investments to address the UK’s productivity problem, as part of the new industrial strategy to be announced next week. Crucially, of course, the OBR will have already known about these measures when revising down its productivity forecasts; one part of government is telling another that its policies just aren’t good enough. If anyone was waiting for a sea-change in elite economic thinking in the UK, the wait goes on.
A large portion of the new funds for the so-called National Productivity Investment Fund (NPIF), which Hammond announced yesterday, will be gobbled up by local road improvements – much needed, but not transformative.
Furthermore, much of what is promised for high-tech R&D comes in the form of tax reliefs, which have limited benefits, or a new £2.5 billion fund within the British Business Bank which Hammond simultaneously announced he intends to privatise sooner rather than later. So far, so Osborne.
The budget contained little of substance from the Treasury’s recent Patient Capital Review, which itself contained little of substance (interestingly, the Review had contained evidence on the lack of effectiveness of tax relief for venture capital into early-stage innovation – precisely the scheme that Hammond ploughed more money into). There was a frustrating reference to clarifying guidance from the Pensions Regulator on whether pension funds should be encouraged to make very long-term investments. The question of course is not whether funds are allowed to make such investments, but whether we have the correct structures for pensions saving which ensure such intentions are realisable.
There was even an implicit reference in Hammond’s speech to the inter-departmental squabbles over who ‘owns’ the UK’s industrial strategy. We might be forgiven for thinking that it belongs to the department with the term in its name, the Department for Business, Energy and Industrial Strategy (BEIS). But Osborne viewed addressing the UK’s productivity problem – often seen as the key objective of any industrial strategy – as firmly Treasury territory.
Accordingly, Hammond described improving productivity as the Treasury’s ‘central mission’. To the untrained ear, it might have sounded like a welcome introduction of joined-up thinking among the UK’s economics ministries. Not so. This was an issue explored at length by the Industrial Strategy Commission, of which I was a member. Hammond and the Treasury have a much narrower views of the causes of, and solutions to, the UK’s productivity problem than BEIS, and indeed Theresa May. Hammond’s speech was a warning to back off – hence the new funds for the Treasury’s NPIF, but nothing for the more visionary Industrial Strategy Challenge Fund, managed by BEIS. This does not bode well for next week’s industrial strategy white paper.
None of the new investments announced by Hammond are unwelcome. But while a few hundred million here and there for high-tech R&D might sound forward-thinking, these measures will make very little material difference to the UK economy. The Commission of course advocated a focus on high-value industries, to make our economy more innovative and export-driven. But there are more urgent problems elsewhere in the economy. Moreover, larger productivity gains can be made by focusing on the everyday economy in all parts of the economy, especially in large sectors like care, where opportunities for innovation are being missed.
The budget also contained handouts for some local authorities – particularly those which have agreed to the metro-mayor model – but with new strings attached too on how they may use this cash. You probably know what I am going to say next: the metro-mayoral model is one of George Osborne’s most important legacies, and he too frequently used the rhetoric of local liberation to mask new forms of central control.
The big headline arising from the budget is of course the near-abolition of stamp duty for first-time buyers. The measure will be viewed and presented as support for young people trying to buy their first home, but in reality (again, as the OBR pointed out) the money first-time buyers save on tax will simply be added to the cost of the house by vendors. The change is designed to act as a general stimulus for the housing market, and support consumption by making existing asset-owners feel better off. It will cost more than all of the new measures to support house-building that Hammond announced yesterday. Something very similar was done by Osborne in 2015. At his last budget, Hammond had already extended Help to Buy, another Osborne ruse designed to stimulate the housing market, despite all evidence of its ill-effects.
As such, the real story of the budget, in short, is that when faced with seemingly intractable economic problems, the government is turning once again to the housing market to paper over the cracks. George Osborne never succeeded in ‘rebalancing’ the UK economy – in truth, he never really tried. Philip Hammond’s tribute act is the last thing our economy needs.
A shorter version of this post was first published on the Political Studies Association blog.