Winner of the New Statesman SPERI Prize in Political Economy 2016

Thursday 23 November 2017

November 2017 Budget: Tinkering rather than Transforming

The big story behind the November 2015 Budget is the absence of a big story. If our economy was doing very nicely with no major problems then minor measures here and there would be fine. In reality the opposite is true. In terms of average living standards, our economy is going through its biggest crisis of my lifetime. Forget about lost decades: annual pay in real terms is not expected to reach the pre-crisis peak until 2025. Productivity growth has been minimal since the low point of the recession eight years ago, and living standards have been further depressed by two large depreciations in Sterling. We now have an economy where growth is slowing, just when growth is picking up everywhere else.

The relevant question for this budget is what the Chancellor is doing about it. The answer, at least according to the OBR, is almost nothing. We know this because the OBR’s growth forecasts take account of all the Chancellor's measures in this and earlier budgets. So in spite of everything this government has said it has done to boost growth in this budget and beforehand, the OBR expect growth per capita to be less than 1%, compared to a steady average of 2.25% between the 1950s and the financial crisis. [1] All the Chancellor can claim is that growth would be even worse still if he had done nothing, or that the OBR has got it wrong.

In truth, though, he is doing almost nothing to boost growth. Rather than expand demand through fiscal expansion, as would be entirely appropriate given that interest rates are at or very near their lower bound and the Bank has been undertaking QE, he is continuing the erratic fiscal contradiction we have seen since 2010. There is a 1% contraction in the cyclically adjusted primary balance pencilled in over the next five years.

The most obvious tool that the Chancellor has to boost both demand and supply is public investment. With the cost of borrowing so low, almost every economist would argue we really should be seeing significant amounts spent on infrastructure investment financed by borrowing. After large cuts in 2010 and 2011, in the last few years we have seen public investment as a share of GDP increased marginally in each budget. In 2017/18 it is expected to be 2% of GDP, rising to 2.3% in 2022/23. This is similar to levels before the financial crisis, when the economy was in good health and the cost of government borrowing was much higher. In other words this level of public investment is totally inappropriate given the cost of borrowing and the extent of the macroeconomic nightmare we are living through.

But, surely, this is a budget for housing, that will finally help all those frustrated first time buyers get on the property ladder. That is what many of the papers tomorrow will claim. The OBR has estimated how many new first time buyers the cut in stamp duty will create: 3,500. As any economist will tell you, the main effect of this kind of measure is to raise house prices, benefiting existing house owners. So this Chancellor is continuing his predecessor’s habit of throwing public money at house owners to keep prices high. [2]

What about all these new houses? assuming they will be built. These would be welcome, but the impact over the next few years on house prices will be minimal given the size of the existing stock of houses. I would guess that a fiscal expansion that let interest rates rise significantly would do far more to bring house prices down, and much more quickly. (To see why, read this.) But then what Conservative Chancellor wants a large fall in house prices on his watch.

Of course there were some other welcome things in the budget, like more money for the NHS. But it is peanuts, and according to the Medical Director of NHS England it will not prevent already high waiting times rising further. The Chancellor is in effect telling those waiting even longer for operations that he is sorry but it was more important to spend £3 billion preparing for Brexit. 

What the Chancellor did not do is just as important as what he did do. This year's measures and previous plans continue to move money from the poor to the better off: cuts to tax thresholds and a freeze on fuel duty paid for by maintaining the cuts in work allowances for families that are part of Universal Credit, and freezes on other benefits. Another regressive budget from a Conservative Chancellor.

I have not mentioned anything about fiscal targets and fiddles to achieve them because it is these targets that helped get us into this mess and restrain this Chancellor for doing enough to make a difference. With demand, investment, the NHS and elsewhere, we can see how the Treasury view prevents the Chancellor taking action of the magnitude required by the scale of this crisis we face, a crisis made far worse by the stupidity of Brexit. Austerity lost us a decade, and Brexit looks set to make it two, but do not worry: the Chancellor is rearranging the deckchairs.

[1] There must be a strong suspicion that even this depressing OBR forecast may be too optimistic. The projections assume that the recent fall in the savings ratio is largely permanent (Chart 3.23). I would be rather surprised if that turns out to be true.

[2] If this was part of an attempt to replace stamp duty with higher taxes on housing wealth I would welcome it, but it is not.  


  1. A good thorough post.

  2. “Rather than expand demand through fiscal expansion, as would be entirely appropriate given that interest rates are at or very near their lower bound..”. Er – “expanding demand” is warranted when inflation is well under control, which according to the economists charged with considering that question, the BoE MPC, it is not. I don’t see why the fact that interest rates are low by historical standards is relevant.

    “..fiscal expansion that let interest rates rise significantly would do far more to bring house prices down..”. Well cutting the price of anything is normally desirable, but if the cut is achieved by artificially making it more expensive to purchase the item (raising interest rates), I’m puzzled as to what the benefit is.

    1. Given that a large chunk of what inflation we have is driven by the fall in the pound, and certainly not a wage/price spiral, inflation really does not seem to be an issue. Indeed, the only way to bring house prices down fairly painlessly would be a sustained burst of inflation in the 5-10% range whilst nominal house prices stayed flat.

  3. I quite agree with you here. The insouciance in the face of the major challenges faced by the economy - in addition to Brexit - is appalling and really smacks of having thrown in the towel on any serious measures to meet these long term challenges.

    The change in the growth profile is quite striking ad when one considers that there will probably be a recession in the next five years then even these figures may be wildly optimistic.

    The further subsidy to the housing market seems to me to be completely "in your face" because all the previous measures have done nothing for supply but merely boosted prices and this is not only what was forecast it is what actually occurred so the evidence is clear.

    1. Yes, I was thinking 'That's the growth profile assuming that there is no recession AND Brexit has no discernible impact'.

      The worrying thing is that the latest meme among some conservatives seems to be that we haven't had 'real' austerity yet. Presumably their reaction to further problems will be to demand even more cuts... where they would come from would be a mystery, never explained.

  4. I hear that Labour has a lead over the Tories on economic competence with the under fifties.

    I think my generation could come to a really good political understanding with the generation that won World War Two, but with the majoritarian politics of the Baby Boomers and their press that just seems impossible.

  5. I think that there is another very significant worry in all of this... It is the phenomenon of "learned helplessness". The country seems resigned to our unpleasant fate because they have come to believe in TINA (There Is No Alternative). There does not seem to be much indication that the country would vote for anything radically different to the depressing incompetence and economic ineptitude that characterise this appalling government.


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