Brexit, Productivity, Growth and the NHS: Questions but Few Answers

To give the Government credit, it has identified the problems: growth will be below 2% for the next five years; wages after inflation will fall until 2022, productivity growth is on the floor; there is a housing crisis; the NHS is in the grip of a funding drought; and the Brexit negotiations are not going well.

On the debit side, they are still struggling to come up with the answers five months after the General Election and 17 months after the referendum on the UK’s membership of the European Union.

This is not for lack of opportunity. Last week’s Budget offered an ideal opportunity to deliver the headline-grabbing announcements to tackle those domestic policy challenges. But while some mention was made, little action was taken.

The Brexiteers promised £350 million a week or £18.2 billion a year for the NHS from money recouped from Brussels. A fortnight before the Budget, NHS England chief Simon Stevens had publicly reminded the government of that promise.

But on the day Chancellor Philip Hammond announced £2.8bn over three years or £930 million a year or £19.9 million a week. There was a mention of £350 million but, in a swipe at Boris Johnson and a sign that Tory politics is broadly an internecine affair, that was the figure Hammond used to identify what the NHS would get to tide it over the winter.

if all else fails the country can be given a Royal Wedding

Productivity — or output per hour worked — has risen by just 0.2 per cent a year since 2008, compared with an average of 2.1 per cent a year over the preceding 35 years, according to Office for Budget Responsibility.

The OBR has now cut its forecast for the trend rate of productivity growth to 1.2 per cent a year from the 1.8% it had hoped for in March. While productivity is a horribly “economicky” word, as Michael Gove might say, it is basically the speed at which the economy can grow sustainably.

If workers are less productive, the economy will grow more slowly and their pay will go up more slowly. The economy will grow by an average of just 1.4 per cent across each of the five years ahead. Average earnings will fall by between 0.3 per cent and 0.8 per cent every year over that period.

Here the Treasury did act by increasing the size of the National Productivity Investment Fund from £23 billion to £31 billion for the five years to April 2022 or around £6 billion a year with money going on technology, housing, and transport infrastructure. To be fair, this will raise public investment as a proportion of GDP and it will reach its highest level in 30 years by 2020-21.

The Government also published a White Paper on industrial strategy which shows that some ministers accept the need for state intervention. Under the plans, the government has pledged to better support the UK’s robotics and artificial intelligence industry and will invest an additional £4.7 billion by 2020 in R&D — the biggest increase from any parliament since 1979.

But as employers and investors have learned, words are cheap but action is often slow to catch up. It is essential that the Government implements its ideas.

Labour has come up with its own plan to invest £250 billion over 10 years to “upgrade our economy”. It would take back the water, electricity, rail and mail industries into state ownership in an asset swap by issuing bonds that would not add to the debt pile and which Labour says would “deliver lower prices, more accountability, and a more sustainable economy”.

The jury is out on these plans and the Institute for Fiscal Studies (at 28’45”) has said that the historical evidence on whether the state can run industries better than the private sector is “not clear”

But if all else fails the country can be given a Royal Wedding. Charles’ and Diana’s betrothal took the nation’s attention away from the bitter 1981 recession and William’s and Kate’s nuptials were a distraction from the global financial crises in 2011.

Next spring, a year before the UK leaves the EU, the nation will be anaesthetised by the marriage of Prince Harry to Meghan Markle. Luckily there is unlikely to be a public holiday, so productivity will not be affected — at least for that day.

 

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