This was an Autumn Statement about the future. Remarkably, just eighteen months before an election, the Chancellor’s sights are shifting away from short-term fire-fighting to the longer term challenge for the UK economy. The big game now is productivity: while growth is up, the Office for Budget Responsibility sees little change in the underlying health of the nation’s economy.
From skills to youth unemployment, today’s Autumn Statement contained a raft of measures to fix the economy in the long-term. The missing element was business investment, which is not rising as fast as growth. Companies still seem to be holding onto their cash piles and nothing that the Chancellor proposes will fundamentally shift this.
The huge surplus that the Chancellor is targeting by the end of the decade raises real questions about his plans in the next parliament. Instead of putting the cash aside for a rainy day, he needs to look seriously at how to invest this to further boost productivity.
Skills and Higher Education
Overview: The Chancellor announced an increase of 30,000 student places in 2014 and the abolition of the cap on student places from 2015-16. He has costed for 60,000 additional places when the cap is removed. This number should climb over time: in a recent pamphlet for the SMF, David Willetts suggested an increase of 100,000 by 2035.
SMF Director Emran Mian said:
Expanding student places makes a lot of economic sense. A third of the increase in labour productivity between 1994 and 2005 was due to higher numbers of graduates in the workforce. By allowing universities to increase recruitment, the Chancellor is encouraging strong, middle-rank universities and new entrants to expand and put pressure on the universities at the bottom. This should mean those universities have to innovate more and offer lower fees.
What makes less sense is seeking to pay for student finance by selling off the previous student loan book. Student loans are a loss-making product, and deliberately so. Private investors will pay less for them than the value government puts on them. Instead of implying that his plans are cost-free, the Chancellor should be transparent about the fact that this means more spending on higher education.
Overview: With over 1 million under the age of 25 not in employment, education or training, the Government has announced two new policies to boost the employment chances of young people: the abolition of national insurance contributions (NICs) for under 21s, and a new scheme requiring young Jobseekers Allowance (JSA) claimants without level 2 qualifications to do 16 hours of training alongside their jobsearch and participate in a work placement after six months.
Emran Mian said:
Getting young people without qualifications to go into training is very much a sheep in wolves’ clothing. Despite being couched in the rhetoric of a benefits clampdown, it is a sensible policy that could improve people’s skills and employability. Taken with the decision to abolish NICs for the under-21s, this is a package to help young people back into work, and could have significant long-term benefits for the economy.
But, having increased the pension age even higher, the Government is much quieter on how it will help the unemployed at the other end of the spectrum. Evidence suggests that people in their 50s struggle to escape unemployment and that many of those on lower incomes are unable to continue in the workplace, for reasons such as ill-health. A truly effective package would have addressed the problem of older people’s unemployment too.
The state of the Public Finances
Overview: According to the latest figures from the OBR, by 2017-18 the Government will be running a structural surplus of £13 billion, slightly less than it was predicting back in March. But by 2018-19, this structural surplus will have more than doubled, to around £32 billion. This means that there will be an absolute surplus of £28bn in 2018-19.
Emran Mian said:
Today’s OBR figures confirm that the Chancellor is going further than just balancing the books in the next parliament. The planned spending cuts start to stack up a significant surplus by the end of the decade.
But given the huge benefits to be gained by fixing the UK’s productivity problem, the Chancellor should consider whether targeting such a large surplus in 2018-19 is the best choice. Even with just the £13 billion surplus being targeted in 2017-18, we could treble science research funding, treble adults skills funding or introduce universal childcare enabling more parents to work – and still have money left over.