From the Office of Diane Abbott MP email@example.com
*In March 2020 the official forecasts for the year were that GDP would grow by 1.1% in real terms and by 1.8% in 2021, and that the unemployment rate would remain steady at 3.8%
*In the event the economy contracted by 9.9%, a virtually unprecedented slump in peacetime and one of the worst outcomes in the G7. Unemployment has risen to 5.1% and a recent survey for the Resolution Foundation shows that many more expect to lose their jobs.
*The importance of this disparity is not to highlight forecasting errors, but to underline the gravity of the current crisis and its effects on real people’s lives, as well as to highlight a key failing of this government.
Under This Government, The Economy Isn’t Working
*That failing is not just the disastrous response to the pandemic, which means that this country has one of the highest per capita death tolls of any advanced industrialised country. It is compounded by the false notion that there was a trade-off between public health and economic well-being. There is not, and repeated delays in lockdown and repeatedly ending them too early to ‘save the economy’ have led to both a public health and an economic crisis of enormous proportions.
*As is frequently the case at the approach of a Budget, the economic crisis is portrayed primarily as a crisis of government finances. But this again mistakes a symptom for a cause. Government finances are under pressure because of the economic crisis, and the economic crisis is a reflection of the failure to suppress the virus.
*Those economic consequences are stark. 1.4 million new people have begun to claim unemployment benefit since the pandemic began. Millions of people have seen their pay slashed. Young people, and Black and Asian workers have borne the brunt of job losses. Others have been ‘fired and rehired’ on lower pay and worse terms, while the government has stood idle.
*Underlying this bleak scenario is the fact that some basic functions of the economy are not working (as shown in the chart above). There is lots of misplaced talk of government largesse, of the ‘gap narrowing between Conservatives and Labour on spending’ and even that the current Chancellor is ‘carrying out Corbyn/McDonnell spending plans.’. The fact is that a public health and economic crisis is exactly the time to increase Government Consumption. Yet this government cut it. ONS data shows that General Government Final Consumption Expenditure fell by 5.7% in real terms in 2020 compared to 2019. To be absolutely fair to the Chancellor, this is exactly what he said he would do in the last Budget, which is a renewed bout of austerity.
*Naturally, with over a million people losing their jobs, millions more either in fear of losing of their jobs and/or having to live on much lower pay, Household Consumption fell by 10.7%. The government as a whole has allowed the pandemic to drag on for a year, rather than for weeks in those countries which suppressed the virus. But the fall in Household Consumption simply highlights that the Chancellor has also not done enough to support jobs and incomes for employees, and hardly done anything at all for the millions of self-employed and The Excluded.
*The other area of extreme weakness is in Business Investment. In all the heat generated about the role and level of corporate taxes, there has been very little light shed on the key variable these are meant to influence, which is Business Investment. Supporters of cutting taxes on profits frequently claim that this will boost Business Investment. Yet, while this country has one of the lowest level of taxes on company profits in the OECD, unfortunately it also has one of the lowest rates of business investment too. And Business Fixed Investment also fell by 10.7% in real terms in 2020. The weakness of Business Investment is a chronic one, which has become acute and is not much higher in 2020 than it was 2005.
*Economic prosperity cannot be sustained by encouraging Consumption. The terrible effects of the Lawson and Barber booms pale into insignificance to the damage wrought by the Chancellor’s wholly misconceived ‘Eat Out to Help Out’ scheme (research from the University of Warwick says it was associated with one-sixth of all new cases over the summer). More fundamentally, people cannot sustainably increase their Consumption unless their incomes are also rising. That requires rising incomes and rising output, which both require rising Investment.
*In addition to the current public health crisis there are multiple crises of the British economy, including in dilapidated infrastructure, unaffordable housing, run-down public services and severe inequalities. Probably the most dangerous and pressing of all is the crisis of climate change. None of these can be address by increasing Consumption and require increased Investment instead.
*Currently, despite lots of talk of incipient inflation, the UK government can borrow for more than 25 years at an interest rate under 1.4% per annum. Investment in all of these areas outline above yields a return on investment that is far greater than the cost of borrowing. It is irresponsible not to borrow to investment when interest rates on government bonds are so low (even below the rate of inflation!).
*The economic plan to revive the economy must begin with suppressing the virus (and transferring the private sector shambles of Test & Trace to the public sector). All those who cannot go to work should be furloughed on full pay up to £25,000 a year and the same should apply to the self-employed. In addition, a wartime level of borrowing to invest should begin both to overcome the current crisis and to tackle the longer-term structural issues that blight our economy and wider society.
*The virus must be suppressed, the underlying economic factors must be addressed, and the pressing issues of climate change, housing, jobs, inequality and so on must be tackled, otherwise they will all simply deteriorate further.