After several years when the economy has essentially flatlined there is now clearly an increase in economic activity and a rise in both consumer and business confidence. GDP growth next year is predicted to come in at 2.4 per cent, close to the historical trend rate. In comparative terms this would be one of the strongest growth rates in the OECD. The projected figures for government borrowing are also welcome, although the Chancellor has been overoptimistic on this score before.
However there are several major caveats. Although the public-sector deficit may finally be on the way down, the share of national income taken by government spending is still far too high and this leaves little scope for the kinds of reductions in taxation needed for increased private spending and investment. It is also not clear that the growth we are seeing is ‘real’ sustainable growth based on genuine rises in productivity and a corresponding increase in the productive capacity of the economic resources of the country. Too much of the recovery is ultimately based upon credit funded consumption rather than investment and consequent improvements in efficiency. There is a real danger that in less than two years we will see serious overheating in the UK economy with tightening labour markets, higher inflation and another sharp rise in house prices. In that event there would be a rise in interest rates, whatever the Bank of England may say now, and the consequences would be serious. This is because of the third major caveat, the enormous overhang of private debt that is left over from the boom years of the noughties which has still not been addressed.
Yet again, there was no serious effort to make the kinds of supply-side reforms that are needed to have sustainable good growth as opposed to short lived credit-based growth. In particular, radical reform of the land-use planning system is desperately needed to allow the building of enough houses to meet accumulated demand (and also commercial and retail space to reduce high fixed costs for businesses). The Chancellor recognised the need for more housebuilding but there has not been the kind of action that is required to facilitate this.
Other underlying and increasingly acute problems were ignored or addressed inadequately and half-heartedly. There was, for example, recognition of the growing problem of pension affordability, with the retirement age raised to 68 in the mid-2030s, but quite simply this is inadequate – the pensionable age should be increased now to reflect longer life expectancy.
After several generally bad years, everyone will welcome the good news that the Statement contains. However we have good reasons to think that the medium-term prospects are not as rosy as the Chancellor thinks; there are a whole number of badly needed reforms that would lead to real growth that have not been made; and a series of long-term problems have still not been properly dealt with.
This article was originally published by the Huffington Post UK.