What If the Chancellor Means What He Says?

This morning’s post-Autumn Statement briefing at the Resolution Foundation, kicked off by Martin Wolf, was on the whole scathing about the Chancellor’s announcements.

Wolf repeated what he said in his FT column that the ambitions on future public spending cuts are “delusional” and that neither the forecast recovery in the current account nor the predicted future rise in household debt is reliable. This is becoming a near consensus view among commentators. The Chancellor for one thinks the BBC has accepted it too readily.

Is there an alternative, more hopeful, or just more charitable in its reading of how the Chancellor sees the next few years panning out? Perhaps. Here are four starting points for it, the final one of which develops a theme that we’ll be focusing on in the next few months: all this talk of spending cuts is fine but soon it’s time to talk about reform as well. No one is for the moment and that’s a large gap in the public debate.

My first point though is about whether there are more upside surprises to come for the Chancellor. No one predicted that employment would grow in the way it has; and it is possible that maybe employment can keep on growing. The OBR reckons it starts to level off. But youth unemployment is still much higher than adult. The gap could keep closing. The trend towards people working until much later into what used to be retirement will continue. More people in work means more income for households, lower welfare payments for government and higher tax revenues.

The flip side of the high employment scenario is low productivity. But this might be the second area where a more positive reading of future prospects can begin. Productivity has been held down partly by the much expanded entry of low- or unskilled people into the labour force. This can be seen as a ‘shock’ to the labour market, a welcome one from the perspective of those people finding jobs, and it is possible that over time good enterprises will gradually become able to put the members of this new ‘periphery’ of the labour market to more and more productive – and well-paid – use.

It is surprising after all that UK productivity has been so disappointing. The US has a high employment rate and still does fine on improving productivity. The task isn’t an impossible one. If our firms were to achieve it too, then real wages might look considerably better than forecast with the upside that would suggest for tax revenues and the household debt ratio. Intriguingly, even Wolf seemed to suggest in his closing remarks this morning that something like this wasn’t impossible. In our pre-Autumn Statement briefing, we modelled what a return to the levels of economic growth seen in the 2000s would do to the public finances and the result is that austerity can stop much more quickly.

My third quibble with the consensus view is that the rising household debt ratio – forecast to go above the pre-crisis peak according to the OBR – should be seen in the light of longer working lives and low interest rates. If both those features are becoming structural, then higher levels of household debt can do too, i.e. higher debt is easier to service when we’re going to be earning for longer and the amount of interest piling on to the principal each year is small. This isn’t necessarily a hopeful vision of the future economy but it might be a sustainable one.

Then finally there’s the election, what I mean is that it’s hardly surprising that the Chancellor is laying his trap for Labour on fiscal discipline now and not laying out his plan for delivering the cuts until after the election. Those cuts might be more moderate than planned, or there may be tax rises in the mix. That much is obvious. Even though saying it requires us to be cynical about the Chancellor’s plans. But what if there’s no nod or wink in his stance, what if he’s serious about reform. Though he doesn’t want to say much about it now, it seems to me that it’s very much possible – and consistent with the Chancellor’s conservative vision – that he won’t moderate cuts or raise taxes, not even after the election, instead the mismatch between our demand for services and the capability of the state to provide them will mean that they will be provided in other ways.

Local authorities might have to improvise their way towards services that we pay them for in order to have them. In other areas we might pay for services through insurance or annual subscriptions and the range of providers might include civil society or private sector organisations. The job of a Chancellor as such change occurs will be to think about the distributional consequences of how co-payments are managed (on the whole it’s easier to levy taxes in a fair way, that’s why states have tended to use them, payments are harder to square with concerns about equity) and the regulatory structures within which the quality and coverage of services is assured (certainly likely to be very challenging as new and replacement-for-state services are developed, in some areas for the first time at scale).

In other words, it is just possible that the Chancellor is neither delusional nor trying to pull off a big confidence trick. But that he is hoping for a significantly improved (and not entirely implausible) set of economic conditions or, if he doesn’t have the luck to get those in the next Parliament, then he will fall back on the hard work – and ideological mission – of remaking the state. The reality is that, given the scale of fiscal consolidation revealed in the Autumn Statement, he probably needs quite a lot of both: higher-than-expected economic growth and reform in the role of the state. Labour has been pointing out that the Chancellor struggled to bank economic growth during this Parliament. Though they haven’t been pressing him very hard on the latter. The reason is that Labour too is shy of talking about how it would remake the state to achieve its own fiscal target.

If we want good quality public services though, and without paying higher taxes or running deficits, then at some point we will have to face up to other ways of paying for those services, which will also mean being open to other ways of them being provided to us. I’m not endorsing that as an approach to managing the next Parliament of pain (thanks for that phrase go to the Resolution Foundation as well) but it is the obvious alternative.


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