Economic growth in the UK is the weakest of all advanced economies. Workers face an eighth year of falling real wages. Yet if it is possible to read anything into the mood music for next week’s Spring Budget, the Treasury may be making a virtue of inaction.
They remain blind to the failure of the economy and the severe hardships endured in the real world. Hardships that have been made much worse by the austerity policies imposed since 2010.
In our statement ahead of the Treasury’s Spring Statement ‘Time for action’ (and a fuller assessment of public service spending, ‘Time for change – the end of austerity’), the TUC are calling for an end to austerity.
The Chancellor should take this opportunity to:
Growth of 1.4% in the four quarters to 2017 Q4 is the lowest for five years, and, as the chart below shows, the lowest of all leading (G7) economies.
GDP growth, year to 2017 quarter four
In 2017 real wages declined by 0.5% (using CPI), the seventh annual decline in the nine years since the global financial crisis. In November the OBR expected another decline in 2018.
On present plans, there is little hope going forward.
At the Autumn Statement yet one more year of cuts was added: expected to endure five years of austerity, we have endured eight and there are still five more to come.
In total that will mean massive cuts of £940 of public service spending per head of the population from 2009-10 to 2022-23.
Departmental spending per head, real terms (16-17 prices)
Source: OBR Economic and fiscal outlook, chart 4.5, ONS historic data and TUC calculations
Newly issued TUC analysis shows the UK spending significantly less per capita on public services than comparable EU countries like France and Germany. Of the 15 biggest EU economies, UK spending is more in line with the weaker countries.
The analysis also shows that over time UK cuts are increasingly among the more severe of the major EU economies.
These measures exclude the impact of coming welfare cuts, expected to be the deepest in years.
As we have argued all along, austerity policies are self-defeating. The OBR and HMT (and most commentators) continue to underestimate the impact of spending cuts on economic growth. As a result: tax revenues fall short of expectations, as do improvements in the public finances.
Public sector net borrowing figures (below) show how earlier goals of reducing borrowing steadily towards zero have effectively been abandoned. Public sector net borrowing is stuck between £20 and £40 billion for the next five years.
Over the past decade (2008-09 to 2017-18) the Treasury has borrowed a cumulative £1 trillion, when it originally planned to borrow £720bn. This has fed through to a failure to meet its target for the public debt: originally expected to peak in 2013-14 at 70.3 per cent of GDP, the public debt ratio is now anticipated to peak in the current financial year at 86.5 per cent of GDP.
Public sector net borrowing, £ billion
This is not the way of the media narrative in the run up to the event. Ever since George Osborne’s rather obnoxious tweet (“We got there in the end - a remarkable national effort. Thank you.”) commentators have dutifully promoted the idea that the books are on the verge of balance.
In November the Office for Budget Responsibility expected the ‘cyclically adjusted current budget deficit’ to move into balance in 2018-19, following a small deficit of 0.3 per cent of GDP in 2017-18. Improvements in the economy relative to the OBR November economy forecast may mean this surplus comes a year sooner.
But Philip Hammond discarded George Osborne’s target. In January 2017 he committed to reducing the ‘cyclically-adjusted deficit’ to below 2% of GDP by 2021 – note the absence of ‘current’, his new target included capital/investment spending. Osborne’s target was discarded because it had proved irrelevant to the health of the public sector finances. A new parliament of cuts required a new target measure. But the new target does not detract from the fundamental point that the public debt ratio is in far worse shape than the countless champions of austerity ever envisaged, Yesterday on Andrew Marr’s show Philip Hammond quietly redefined up to 100 per cent of GDP what bad debt looked like. The academic literature (admittedly now proven flawed) warned of the perils of 90 per cent, but this was the context for Osborne’s aiming at 70 per cent.
An end to austerity
Workers have endured a lost decade since the global financial crisis.
With another five years of cuts, hardship will be extended indefinitely.
These cuts to public services and infrastructure, the attacks on the pay and conditions of public sector workers, and the dismantling of welfare payments to those in greatest need of protection are unjust and harmful from a social point of view. The experience of the past eight years proves they are also unsound from an economic point of view. Is this ever going to get through?
The only way to protect the economy and to ensure rapid improvements to the public finances is to reverse future cuts, begin to invest in the UK infrastructure and public services, and deliver pay rises across the board.