Responding to the election result, SMF chief economist Scott Corfe said:
“The key takeaway point from the election is that the economic settlement we have is not working for swathes of the population, most notably those on low incomes, those under the age of 40, public sector workers and those in economically struggling regions.
“This fact has been masked since 2014 as low inflation has propped up spending power. Now inflation has returned following the collapse in the pound after Brexit, we are once again confronted with the reality of the current economic settlement, where average incomes are struggling to keep pace with the cost of living.
“Inflation data released today by the Office for National Statistics showed price growth, on the headline CPI measure, rising to 2.9% – the highest level since June 2013.
“With the economy slowing as inflation rises and wage growth stagnates, there is a strong case for fiscal stimulus. In my view the priorities should be:
- Infrastructure spending
- Direct investment in housebuilding
- A better settlement for public sector workers who have faced prolonged pay freezes
“Construction has a particularly high ‘economic multiplier’ as much of the spending is domestic rather than imported, so infrastructure and direct investment in housing could have a strong positive effect on economic growth.
“Having said that, let’s not forget the reality that the UK still has one of the highest fiscal deficits in the world. A fiscal loosening will need to be paid for eventually. Financial markets have given the Tories significant leeway to date in slowing the pace of austerity, but they could lose patience if deficit elimination is pushed much further down the road.
“The reality is therefore that taxes probably need to rise over the coming years – something which both parties have been dishonest about during the election campaign. Labour’s plans to ‘tax the few, not the many’ are unlikely to bring in the required revenues for large increases in spending, given the ability of corporations and top earners to relocate easily to other, lower tax regimes.
“A new economic settlement, with higher levels of state spending to boost the living standards of the Left Behind, may need to accept some fairly broad tax rises in areas such as national insurance contributions.
“Productivity growth and innovation can offset the need for tax rises. For example, the technology exists to provide much more university education over the internet – offering students low cost degrees and greater flexibility to balance work and study. Radical rethinking on education could address the rising cost of university education without costly government funding of this education.
“Ultimately, there is a short-term and a long-term case for easing off austerity. The short-term case is to prop up an economy which has lost significant economic momentum in 2017.
“The longer-term case is to provide a new economic settlement for the Left Behind. The key priority areas here are addressing the housing crisis, containing the cost of university education, and boosting wages and skills. There is real scope for the Government to deliver radical reforms in these areas – and win over voters disillusioned with the current economic settlement.”
NOTES TO EDITORS:
- About the Social Market Foundation:
The Social Market Foundation (SMF) is an independent, non-partisan think tank. We believe that fair markets, complemented by open public services, increase prosperity and help people to live well. We conduct research and run events looking at a wide range of economic and social policy areas, focusing on economic prosperity, public services and consumer markets. The SMF is resolutely independent, and the range of backgrounds and opinions among our staff, trustees and advisory board reflects this. https://www.smf.co.uk