With every budget there are three broad sets of questions. What are the problems in the economy? What is the government doing about them? And, often overlooked, what are they not doing? The interaction between these questions form the narratives that shape any budget response, but as with most political analysis, there is often far too much attention paid to the new policy announcements and far too little interest in the big problems that the government are failing to tackle.
The same was true of Philip Hammond’s second budget of the year earlier this week. Much of the coverage has focused on the chancellor’s attempt to target young people with a package of new policy measure including extending young people’s railcards and waiving stamp duty for first time buyers. The housing crisis for young people is real but these policies will little to address it, in fact the Office for Budget Responsibility argue that the stamp duty cut will actually push up property prices and harm the very aspirant young people it is supposed to help. This argument about how to make our economy work for young people is important, but for me it was not the story of this budget. The belated Tory attempt to win back young voters maybe be politically interesting, but economically it is of far less significance than the looming challenge the country faces in another area: productivity.
Britain’s productivity crisis has been the elephant in the room at budgets for many years but has been under analysed for two reasons. Firstly productivity is hard to explain and even harder to interest people in. Secondly, nobody seems to have a compelling solution to the problem. But the productivity challenge is no longer one we can afford to duck. The OBR significantly downgraded GDP growth in the budget, breaking a new record as the worst outlook for growth in modern times, with the economy set to expand by less than 2 per cent in each of the next five years. The underlying cause is stubbornly stagnant productivity as the output per hour of British workers remains flat.
This may seem abstract but it the effects are about as real as they come. In simple terms, flat productivity means flat wages. Flat wages combined with the spiralling inflation caused by the Brexit-induced depreciation of sterling means a huge squeeze on the cost of living. Add in the brutal benefit cuts already planned and you get a perfect storm with one outcome: rising poverty and especially child poverty. The Institute for Fiscal Studies have warned that the number of children growing up in relative poverty, already at a disgraceful four million, will rocket by another million in the next five years. To their shame the Conservatives have ignored this problem, even attempting to prevent people measuring child poverty, and once again it was absent from the budget speech. In fact it was only the excellent work of Labour MPs like Joan Ryan that made sure the issue was raised at all.
So what should the chancellor have said? The easy starting place is a reversal of the benefit cuts that will hammer families and increase poverty, but this on its own is not enough. With rising in-work poverty any serious child poverty strategy must be focused on raising wages and therefore must have at its heart a solution to the productivity puzzle. This for me was the main failure of this budget. While there were some warm words there was little real action. The budget red book rightly points out that “closing the gap between the UK’s productivity and Germany would increase the size of the UK economy by a third” so where is the ambition to match the rewards on offer? The grandly named National Productivity Investment Fund doesn’t kick in until 2022 and most of the other measures amount to tinkering with traditional measures like skills and research and development.
Just as worrying as the limited nature of the response is the focus on futuristic innovation, technology and skills. Ministers love talking about these policies because it makes them sound clever and cutting edge, but what they don’t like talking about is the fact that the real productivity crisis is in the lower end of the lower market in sectors like care and hospitality. Helping people who work in these sectors to progress, seek promotion and increase their hours is vital to increasing UK productivity, but there was hardly any mention of the bottom end of the labour market in the red book.
This is why I have argued that the best policy solution to the productivity crisis is to move the focus from investing in physical infrastructure like roads and rail towards social infrastructure and especially childcare. Introducing universal free childcare would at a stroke eliminate a huge cost from struggling families, easing the child poverty crisis. It would allow thousands of women to increase their hours or return to work. And it would boost productivity by taking the strain of parents and allowing them to focus on training, going for promotion and improving their output. What is more it may have an added bonus in the long run as high quality childcare helps close the educational attainment gap and ensures children arrive at school ready to learn.
The chancellor’s failure to see social infrastructure as the key to tackling our stagnant productivity, or even to mention childcare at all in his budget speech is for me the story of this week. Without action now the problem will continue to worsen, the economy will weaken and families in Britain will suffer. Rising child poverty and stagnant productivity are two sides of the same coin, this budget proved that the government are unwilling to address the former, unable to solve the latter and unfit to govern our country.