Wednesday’s autumn statement was a stark admission of two things: the failure of the last six years of economic policy, and the sheer cost of Brexit. It failed on the tests of fairness and fell far short of what we need to properly build a strong future.
Many of us raised concerns about the economic consequences of Brexit and rightly so. Borrowing is set to increase by £122bn, of which the Office for Budget Responsibility says £59bn will be due to Brexit. The Brexiteers can no longer underplay the economic risks and consequences of leaving the European Union.
But we cannot let the cost and risks of Brexit distract from the underlying weakness of our economy.
George Osborne, David Cameron, Philip Hammond and Theresa May might not have voted for Brexit – but they are to blame for the economy being ill-equipped to face it. They cannot shirk responsibility for the situation we now face, with national debt set to rise to a modern record of 90.2 per cent of GDP, £1.9tn, an increase of £220bn. By 2020, debt will be double what it was in 2010.
Osborne’s strategy to debt reduction was economically illiterate at best. For years, Labour – and economists – have been arguing that you cannot simply cut your way to growth. Osborne’s political choices have been far more about a small-state ideology than any sound economics.
For six years we have been told of the all-important fiscal mandate and the imperative of a rigid deficit reduction plan. This did not materialise, of course, and George Osborne missed every target he set himself. But now that Brexit is on the cards, it is as though the Tories have decided the charade is over. No more fun and games, they say, no more fooling around with arbitrary targets as an excuse to cut welfare – it is time to actually fix the economy.
Consequently, Hammond has immediately scrapped the fiscal rules and consigned the surplus target to the dust, ‘leaving enough flexibility to support the economy in the near-term.’ He has then launched the national productivity investment fund, injecting £23bn over the forecast period in much-needed investment in infrastructure.
These are much needed and welcome changes. But this should have happened five years ago. Our poor productivity performance and our sluggish wage growth are not recent phenomena.
For example, where is the investment in skills and training? Instead of reversing the eight per cent school funding cuts the Institute for Fiscal Studies have identified, the chancellor instead is spending £240m on rolling out grammar schools.
I challenged the chancellor on this on Wednesday, and was disappointed by his casual response. I pointed out that schools in my constituency are having to fill in for welfare cuts, a story covered by the Guardian earlier this week, helping parents to buy uniforms, shoes and stationary. Addressing productivity is more than building roads – it is investing in the skills of our young people also.
The chancellor needs to go much further if he is to be serious about addressing our poor productivity.
The OBR has revised down cumulative growth over the forecast period by 1.4 per cent, and growth next year is revised down from 2.2 per cent to 1.4 per cent. The main cause, they write, is the weaker outlook for investment and therefore a slowdown in productivity growth.
Low investment worsens our productivity, which directly affects wage growth. Average earnings growth has been revised down, which again the OBR attributes to lower productivity growth.
As people earn less, this in turn reduces tax receipts. Income tax and NICs receipts in 2020-21 are forecast to be £23.1bn less than forecast in March. This is by far the largest downwards change to tax receipts forecast. Broken down by economic determinant, 40 per cent of this downward revision is due to the revision of average earnings.
As the IFS points out today, real wages are set to remain below 2008 levels until 2021, the longest wage stagnation in post-war history. In case we need a reminder, this is not some abstract economic measure – this is people’s livelihoods.. Families in our communities are bearing the cost.
The problems do not end there. He failed also to significantly reverse the cuts to universal credit, or reverse his expensive cuts to corporation tax. There was no mention of the National Health Service – now with a £2.45bn deficit – or any good news for social care.
The chancellor has finally begun to recognise that we can no longer ignore low productivity, low investment and low wage growth – and the future impact on our public finances. The costs to the exchequer can no longer be disregarded. He needs to act quickly and be more ambitious with his investment to address productivity. The autumn statement is but a small step to correcting the failures of his predecessor. The stakes are higher than ever.
Seema Malhotra MP is member of parliament for Feltham and Heston. She tweets @SeemaMalhotra1