At this year’s Conservative Party conference, Theresa May announced with much fanfare that austerity was “over”.
Next week’s Budget will be the first chance to see if she meant what she said.
After eight hard years of spending cuts, a change of direction is urgently needed.
But until the government starts to invest in the economy properly, we won’t be holding our breath.
When George Osborne announced the start of austerity back in 2010, he argued that cutting spending to reduce the deficit was “a necessary precondition for sustained economic growth”.
According to his logic, as the government spent less, the private sector would spend more – and this would in turn boost economic growth.
But as workers suffering from weak wages and insecure work know all too well, the last eight years have seen some of the weakest economic growth we’ve experienced in the post-war period.
As the following chart shows, GDP per head grew by an annual average of only 0.4% in the decade to Q2 2018. Even during the weakest decade before this, GDP per head expanded at five times this rate:
Uncertainty around the outcomes of the Brexit negotiations isn’t helping either.
According to the most recent figures (for countries where second quarter data in 2018 is available), the UK economy is growing significantly slower than our major rivals:
Slow growth means it has taken far longer than planned to get the public finances closer to balance.
According to the OBR’s original forecast when austerity was first announced back in June 2010, the deficit would become a surplus in 2014-15.
On their spring 2018 forecast, the surplus was expected to materialise by 2019-20, with the latest figures showing this could be achieved at 2018-19 at best. Even if this proves to be the case, it will have taken 10 years – twice as long as forecast – to get to the balance that austerity was aiming for.
One of the ways in which austerity was imposed was by cutting government investment on capital projects.
According to the OBR, public sector net investment fell from £46bn to £41bn between 2010/11 and 2017/18 – at a time when the country badly needed investment in transport, broadband and clean energy, and the economy really needed support.
And while the Chancellor has now said he’s going to raise spending in this area, we’re still far behind our major rivals when it comes to boosting investment.
As TUC research published in September showed, we’re near the bottom of the league table in public investment terms, ranking 24th out of 32 countries:
At 2.6 % of GDP, UK public investment is well below the 2016 OECD average of 3.2%.
Government plans will increase this to just 2.8%, improving the UK ranking by just one position.
The link between investment and economic prosperity is widely understood.
The OECD itself says that:
Investment spending has a high-multiplier, while quality infrastructure projects would help to support future growth, making up for the shortfall in investment following the cuts imposed across advanced countries in recent years.
That’s why the TUC is calling for a £20 billion annual increase in public infrastructure investment to help us catch up with the OECD average.
Investing to build world-class transport and public services will also help communities thrive and attract new business investment across the country.
So we also need a National Investment Bank that will focus on rebuilding the country, not building bigger profits.
If the Chancellor really wants to show that austerity is over, he’ll need to start investing.