A Budget That Failed To Build For The Future

George Osborne’s eighth budget was apparently aimed at “the next generation”. The Chancellor used this phrase on 18 occasions during his hour-long Commons statement. This was a policy package for “the long-term” Osborne told us an astonishing 19 times.

The budget also offered “major new commitments to national infrastructure projects” – the i-word getting no less than 10 mentions. What with the “sugar tax”, though, shaky fiscal rules and rows over disability benefit, last week’s infrastructure announcements haven’t received much attention.

It’s not surprising the Chancellor emphasized infrastructure in his latest Commons set piece. Better roads and railways are vital, after all, if Britain is to address its worsening “productivity problem”.

A complex measure, broadly defined by economists as value generated per hour worked, UK productivity has recently plunged. Partly reflecting strong job creation, falling productivity also hits incomes and profits, denting consumer spending and investment and translating into weaker growth and tax receipts.

While the Chancellor only briefly mentioned productivity last Wednesday, the concept was at the heart of detailed analysis from the independent Office for Budget Responsibility. Between 1994 and the start of 2008, UK productivity grew by 1.9pc a year – in turn, driving post-inflation wages, growth and rising prosperity. Since the financial crisis, though, productivity is up just 0.1pc per annum, the OBR reports, with a sharp deterioration over the last six months.

Lower productivity, rather than the gloomier global outlook, explains the OBR’s downgrade of official UK growth assumptions – from 2.4pc and 2.5pc this year and next, to 2pc and 2.2pc – since last November’s Autumn Statement.

“Our main reason for reducing economic growth isn’t the world economy going to hell in a handcart, it’s because we feel productivity growth isn’t going to be as high as we thought it would be,” says Professor Steve Nickell, a vastly experienced OBR economist. “It’s as simple as that”.

This fall in projected growth over the next five years has played havoc with Osborne’s fiscal forecasts. The resulting weakness in tax revenues amounts to a £53bn drag on the public finances, wiping out the £27bn windfall the Chancellor spent in his Autumn Statement – a move some of us warned against.

Raising UK productivity, of course, is partly about education and skills – hence the recent emphasis (not nearly enough, some would say) on apprenticeships and other vocational training. But it’s about better infrastructure too. That’s why, if he’s to paint a convincing picture of our public finances over the course of this Parliament, with the deficit falling amidst strong growth, the Chancellor needs to talk about infrastructure. But is it all just talk?

I’d say the picture is mixed. On the one hand, the UK is home to Europe’s biggest infrastructure project. A large section of Crossrail, from Paddington to Abbey Wood in South-East London, is due to open by the end of 2018. The Western section, beyond Paddington to Heathrow, extending to Berkshire commuter towns, should be operational a year later.

While many living outside the South-East complain, over 60pc of Crossrail’s funding is coming from Londoners and London businesses – through a combination of fares and targeted taxation. Crossrail is long overdue and will hopefully keep the heart of the UK economy pumping, to the benefit of the country as a whole.

Osborne’s “Northern Powerhouse” initiative, though, announced two years ago, seems so far more talk than action. Transport for the North, the body commissioned by government to draw up plans to transform transport in northern England, recently proposed a high-speed trans-Pennine rail link to slash north-west to north-east journey times, as well as a road tunnel connecting Manchester to South Yorkshire.

The UK economy is clearly regionally imbalanced, and addressing that – not least by linking up the northern cities, so they become a second UK growth-centre competing on the world stage – would boost the entire country. A revitalized North could generate over £56bn of additional value a year by 2040 in today’s prices, says Transport for the North, adding 1-2pc to the size of the overall UK economy.

What we saw on Wednesday, though, was funding for the North largely focused on yet more feasibility studies. While there was a hard cash pledge of £161m to accelerate the M62 four-lane upgrade to the south west and north east of Manchester, little else the Chancellor unveiled will lead to spades in the northern soil soon.

The £75m allocated “to further develop the case” for a Pennine tunnel between Sheffield and Manchester, was greeted with groans. Even the “green light” given the trans-Northern HS3 high-speed rail link amounts to just £60m to “explore options” – most of which will go to consultants.

In Newcastle and Middlesbrough, business leaders are increasingly alarmed that what funding there is seems focused on transport schemes around Manchester and Leeds at the expense of the North-East, which has the UK’s highest rate of unemployment. There have been more general mumblings, with £151m going to fund new river crossings at Lowestoft and Ipswich in Eastern England and increasing attention on London’s north-to-south Crossrail 2, that the “Northern Powerhouse” is little more than a political gimmick to decontaminate the Tory brand in parts of the country where the party has often struggled to attract support.

The government faces a tough referendum on EU membership in just three months’ time – and in a referendum every vote counts. Unlike a general election, which is determined in 120-150 marginal constituencies, any single voter could in theory tip the balance on 23rd June. That’s why Osborne last Wednesday threw his infrastructure-related scraps so widely – lower tolls on the Severn Bridge, stronger sea defences for rail in the South West, a bypass here, some potholes filled there – to win favour with as many potential Remain voters as possible.

In truth, government infrastructure spending has fallen sharply – down no less than 8pc between 2010 and 2014 according to the Office for National Statistics – and the Chancellor did little to reverse that. Net investment in the public sector, in fact, is now set to fall to just 1.5pc of GDP, almost £100m less than in the Autumn Statement.

What was really surprising about this budget, striking me as both an economic and political blunder, was the near absence of measures to boost house-building. Much was made of the new “lifetime ISA” enabling those under 40 to save for a deposit for their first home alongside a pension. Yet, by stirring up demand, without boosting housing supply, this is likely to boost prices further, making life even harder for “generation rent” – the 61pc of 25-39 year olds who currently aren’t home-owners. “We think [the lifetime ISA] is more likely than not to lead to higher demand for the relatively fixed supply of UK housing, and so to higher prices,” said the OBR’s budget-day fineprint.

It’s true that house-building has recently increased. Around 143,500 new homes were started in 2015, 6pc up on 2014. But that’s still 22pc lower than in 2007 and nowhere near the 250,000 new homes we need annually to tackle the UK’s chronic home shortage.

Over the last century, practically every UK recovery has been associated with a sharp rise in house-building. Since the financial crisis, though, this vital sector has been in a slump. Construction activity overall – despite a screaming need for more homes and better infrastructure – remains more than 4pc below its pre-recession peak.

“We are the builders,” says George Osborne. Really?

Follow Liam on Twitter @liamhalligan

http://www.telegraph.co.uk/business/2016/03/19/budget-missed-out-on-steps-to-encourage-housebuilding/

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