As the vaccine scheme edges Britain closer to normality, the Chancellor must use the upcoming Budget to establish a credible macroeconomic framework for a post-pandemic Britain. So far, the government’s expansionary fiscal policies, such as wages subsidies and business support schemes, have weathered the impact. Unemployment is predicted to rise to 7%, or lower, compared to 9.4% in the Eurozone. UK GDP will return to pre-crisis levels by Q1 2022, or sooner, compared to the EU, whose growth won’t reach pre-pandemic levels until the middle of 2022, or later. Indeed, lower unemployment, coupled with the huge savings rate, will support a strong rebound in spending growth and aggregate demand this year. Going forward, the government must promote growth in three key areas whilst maintaining debt sustainability. These are technical skills, infrastructure and green technology.
The Chancellor must invest in compulsory technical education for years 10-11, with modules in areas such as computer science, bricklaying and construction. This would involve the private sector by allowing some topics, such as software development, to be done with employers in established firms, where they can gain both practical and theoretical skills that are wanted by employers. This is especially important for the digital economy, as it would provide students with apprenticeship offers through which they can ensure productive and allocative efficiency to ensure economies of scales for sectors like digital and creative. Higher productivity would increase wages, as well as the country’s potential growth rate, leaving it less susceptible to inflationary pressures and tighter monetary policy. Any apprenticeships could be funded by the government for one year by replacing the triple lock on pensions with a double lock, which would be tied to inflation rather than wages.
The government must also accelerate the construction of new train lines for LNER, by replacing HS2 with new train lines and faster trains to increase connectivity and productivity. However, given the shortage of skilled workers, using technical education to create the right workforce could help ensure that capital spending projects deliver a sizeable fiscal multiplier effect, and prevent diminishing returns on labour productivity.
Investment in renewable technologies, like wind turbines, is the pathway to decarbonisation, and to providing increased employment in the North of England in manufacturing. These schemes must be prioritized. Additionally, the government must subsidise electric car batteries being created by car firms such as Nissan, to expedite electric car production and support jobs, capital investment and our precarious planet.
The Brexit Deal also cements a climate for long term investment in the U.K., from greater certainty to the ability to utilise regulatory divergence. Greater control over tariffs and regulations can enable business to compete with emerging markets like Singapore and India. Reducing tariffs on cars would help car companies to compete with the countries of South-East Asia, which are largely responsible for the UK’s declining manufacturing industry. Importantly some of the benefits of divergence are already evident, such as the UK’s early contract with AstraZeneca, which the economist Julian Jessops notes could add about 2.5% to GDP if it enables our economy to reopen three months earlier than the EU.
As a final point, instead of raising corporation tax, we should keep it at current levels, or cut it to reduce the burden on workers. Southwood (2014) finds that the average share of the corporate tax burden shouldered by workers is 57.6 per cent of the amount raised by the tax, with this leading to lower wages. Fuest et al. (2013) find that for every percentage point increase in the corporate tax rate, wages decrease by between 0.3 and 0.5 per cent. This would in turn reduce private consumption in the economy, as people’s purchasing power declines, and also increase unemployment or slow the rate at which it falls, leading to an even larger fall in spending and aggregate demand. Coupled with low productivity – which would also reduce potential growth and leave us exposed to inflationary pressures and higher interest rates – the economy would be smaller and borrowing higher. How do we finance dept without raising consumption taxes that risk stifling demand in a recession? Targeted infrastructure investment and cutting taxes for capital investments, in order to stimulate productivity to increase the country’s long run trend rate of growth.
Borrowing will fall as the economy recovers. According to the CEBR, the UK economy will grow by 4% annually from 2021-25 and 1.8% annually from 2026-30 (after shrinking in 2020) compared to 1.9% and 1.6% respectively in the US. Growth will finance borrowing. The OBR forecasts the budget deficit will fall from about 19% now to less than 3% by the end of the Parliament, with dept interest payments below 6% and dept on course to fall to 60% of GDP by 2030 if growth left uninterrupted. Low-interest rates finance dept more easily, and any rise would not significantly increase dept interest payments on current borrowing, as the average maturity of the current dept is about 15 years leaving us not exposed to rate rises. However, once the economy is growing persistently at its pre-COVID rate of 1.4%, or higher, the U.K. could aim for a surplus in preparation for the next recession.
These are the attitudes and economic policies which I think should be adopted by the chancellor.
