Budget 2017: City economist provides analysis
Professor Michael Ben-Gad gives his reaction to Chancellor Philip Hammond’s budget speech
Keeping windfall from higher growth was a good decision
Despite calls to spend some of the extra revenue generated by higher than expected growth, Chancellor Philip Hammond has chosen to hold firm and bank most of the approximately £10 billion windfall. Good.
The micro details of the spring budget obscure far more important macro truths. With every passing year being Chancellor, indeed being the Finance Minister of nearly every western democracy, becomes more difficult. The reason is simple enough, the combination of falling rates of fertility and longer life expectancy is generating a perfect storm of rising dependency ratios that each year make budgeting ever more difficult.
Only the mass immigration of young people from abroad (provided they are skilled), or reconsideration of the rather generous promises governments have made to current pensioners and the older middle aged, can arrest the declining fortunes of the UK or its counterparts on the continent, Japan or North America. Nothing in the current political climate suggests that this is even remotely likely.
The UK debt burden will continue to rise despite recent cuts
UK general government spending (on both consumption and transfers) constitutes just over 43% of GDP, but the government only collects approximately 39% in revenues. The difference means that despite the cuts to some frontline services, the debt burden has continued to grow since 2010, and at best may level off by the end of the decade. Long-term, as the population ages, none of the cuts introduced so far will keep the debt burden from beginning to rise in ten years’ time very fast before reaching 225% of GDP in fifty years’ time (OBR, Financial Stability Report, January 2017).
So more austerity for now? Hardly. Consider the UK’s Balance of Payments. The Current Account (exports minus imports) was last in surplus in the year 1983. In 2015 the deficit was 4.3% of GDP and on current trends may exceed 5% in 2016 (we will know when the data is released at the end of the month). Discount the rising tide of protectionism across the Atlantic, in actuality there is nothing inherently wrong with running a current account deficit.
Indeed developing countries with youthful populations should be running deficits to finance at least some of their investment needs. Here in the UK however, this is not the case. Instead, it is this excess of imports over exports that allows the UK to live beyond its means and which effectively financed most of the public sector deficit. The remainder was covered by declines in overall investment (from 24.4% of GDP in 1989 to 16.9% in 2015). That is what the accounting relationship that equates total savings with investment plus net exports in essence implies.
In effect, the UK has been selling assets abroad to fund a lifestyle at least some of its citizens could not otherwise afford. The much commented sales of luxury flats in London to foreigners or the fact that all the car assembly plants are foreign owned are but physical manifestations of this reality. Yet it is not the lifestyles of the young that these policies effectively subsidise – far from it. Today's pensioners enjoy incomes that now exceed those of working families (Resolution Foundation).
What the Chancellor missed out of his budget speech
What we did not hear today is any indication that the Chancellor or anyone else is willing to tinker with the triple lock on pensions. Nor is there much taste for tackling the rampant NIMBYism fuelling the rapid rise in the value of houses – another mechanism that extracts resources from the young to subsidise their elders.
Instead, there is as usual a bit more money for the NHS and an extra £2 billion for social care, offset by yet higher national insurance contributions from at least some of those who do work (equalising the taxes between employees and the self-employed is perfectly sensible, but without a change in priorities this could only be done through increases).
There are complicated reasons why the balance between the generations has shifted so acutely against the young throughout much the West in the last few decades. Lower fertility, fraying family ties and divorce, perhaps more immigration and emigration too, which mostly changes the ethnic composition of younger cohorts may induce a preference for the short term. Shifting cultural norms may also play a role. Whatever the cause, none of this is likely to be sustainable in the long-run.