A verdict on the Autumn Statement
The UK economy has been nearly stagnant since the Great Financial Crisis. While headline aggregate real growth rates are anemic, once population growth is accounted for the figures are even worse. One useful comparison is the performance of the US economy. In 2008 UK GDP per capita, in Purchasing Power Parity terms, was 76% of the US level. In 2022, it was only 71%, and it is reasonable to assume, given the gap in growth rates so far this year, that that number will drop below 70% in 2023. By way of comparison, the figures for Germany are 79% of the US level in 2008 and 83% in 2022, having risen as high as 89% in 2019 and 2020. Full expensing of business investment is a welcome change as it may help lift the UK’s dismal rate of investment (Gross Capital Formation), at 17.34% of GDP, which is the second lowest in the OECD. (Greece is at the bottom with 17.22%.) The OECD average is 22.14%.
Nor is the pain equally shared. As the population ages and the share of the retired grows, the burden of funding the British state falls more and more heavily on younger workers. Having recently turned 60 myself and achieved the not so coveted status of ‘old man’ (and a grumpy one at that), I find a policy of punishing people for being young is not without its charms. Yet hard as it is for me to admit, young people actually do have reason to feel aggrieved by policies such as the triple lock that ratchets up the real value of state pensions year after year (8.5% in this budget statement) while their own incomes are eaten away by both inflation and higher taxes through fiscal drag. The 2% cut to National Insurance is good news for them, but this constitutes only a marginal change to the overall trajectory of higher taxes. Nor will it necessarily incentivise people to work more given that overall, the ongoing freeze to income tax thresholds means that more people will face higher marginal tax rates over time as wages and prices rise together. The increase in the living wage to £11.44 will also have a disproportionate negative effect on smaller business who employ low skilled workers and increasing out of work benefits by 6.7% (in line with inflation) will do nothing to encourage more people into the labour force.
Speaking of work, one measure of the way fiscal policy in the UK is skewed to benefit the old at the expense of the young is to compare labour force participation rates across different cohorts. At 81.9% for 25-64 year olds the UK’s performance exactly matches the average for the OECD. However, for 55-64 the figure for the UK is 66.1% against 67.4% for the OECD. The gap is larger still for people near or above pension age. In the UK only 11.1% of people aged 65 or older are in the labour force, against an average of 13.4% across the OECD. There are lots of ways to interpret these numbers. Perhaps age discrimination is particularly rife in the UK and people are being forced into early retirement. Alternatively, perhaps older people can more easily afford to retire though the state pension age in the UK is not especially low.
Neither the tax cuts nor extra spending in yesterday’s budget will pay for themselves: the UK government will need to borrow more. At the moment, once inflation is taken into account, the UK can still borrow at negative real interest rates, but as inflation recedes, that may not be the case in the future. That will necessitate primary surpluses (more taxes and less spending) to keep the debt mountain (97.8% of GDP) from growing still further.
Two elements that could help the UK economy grow were largely missing from the budget statement. One would be a rise in the threshold for the payment of stamp duty. The current system disincentivises geographic mobility, locking people in place, rather than encouraging them to move and pursue opportunities where they are available. It also keeps older people in homes larger than they need, rather than selling them on to young people starting families. Overall, the wedge stamp duty creates between the price received by sellers and paid by buyers makes the allocation of the housing stock less efficient and discourages young people from settling down and raising the country’s next generation.
The UK also needs further improvements to its immigration system. While the introduction of a point system back in 2008 was a good start, and it has been improved upon slightly most recently last August, there is more that can be done to ensure that the people who arrive are likely to raise productivity and make a net contribution to the public purse rather than simply filling gaps at the low skill end of the labour market.
Defense spending will remain at the Nato minimum of 2% despite the worsening geopolitical atmosphere. From that I learn that the UK government is reasonably confident that Russia is too busy fighting in Ukraine to invade a Nato country or sabotage the UK’s vital infrastructure in the North Sea. We can only hope their assessment is correct.
Prof Michael Ben-Gad is a Professor of Economics at the City University of London.