This is Part 5 of Tortoise’s election primer. Part 4 is here.
Our recent national psychological breakdown has masked the fact that economic growth has, in recent years, been weak.
But there are other problems, too. In the year to the first quarter of 2019, the UK economy grew by 2.2 per cent – a good performance by recent standards. Even then, though, growth was concentrated in a few places.
Part of this is due to Brexit. We are a few percentage points down from where we would be if the question of our relationship with the EU were not hanging over us.
In the immediate future, there is little prospect of things getting better. For one thing, British businesses are unable to rely on buoyancy in other markets, as the increasingly fraught world economy is losing steam.
But this is also about longer-term problems. Take labour productivity. This arcane concept is a measure of the amount that the average worker can make in an hour. This is the engine of continuing prosperity: the industrial revolution marked the moment at which technical change allowed our economy to race away, growing faster than our population.
But output per hour has grown in the past ten years roughly as much as it usually grows in one.
The flip-side of weak productivity growth, though, is the fact that unemployment is very low. Another way to frame the so-called productivity puzzle is that workers in low-productivity jobs have been kept on.
At the same time, though, low-productivity jobs are low-paid jobs. And there’s been little pay growth over the past decade.
A new report by the Resolution Foundation suggests that the reason for the low unemployment is that, with pay failing to have risen in recent years, people just need more work.
But we should be clear: things are better than they were a few years ago. Pay is one thing that has definitely improved since the 2017 election.
This has been helped by a rise in the minimum wage – something that is likely to keep on happening over coming years.
One of the most important problems in the field of living standards is the housing market – which contains a statistical oddity.
Imagine two houses: one with four adults renting a room each, and one with an elderly widow living in their own home. The normal way to account for that would be to count the homes – which are 50 per cent owner-occupied. But it is really five households, of which four are renting.
If you correct for that, the number of households in owner-occupation is heading to be a minority of British households. We will soon be a majority-renter place.
Even the way Britons think about home ownership is wrong. Since 2013, there have been more people who own their homes outright than with a mortgage. Owning a home with a mortgage is not the norm: fewer than one quarter of households live this way. The number of mortgage-holders has dropped by ten percentage points of the population since the 1990s.
This stuff matters. The economy is much less vulnerable to house price falls than you might think, because negative equity matters less than ever. But also it makes the failure to sort out renters’ rights and the rental market completely baffling.
The housing charity Shelter estimates that 54 per cent of working families (defined as having at least one working adult and a child in the home) are paying more than 30 per cent of their income in rent. For young people, in particular, cost of living has been a major problem.
Building more social housing is probably part of any answer. The May government did do something: it removed the cap on borrowing by local government, which enabled municipal governments to build more social housing.
When this was announced, there was hope of six-figure increases in the public housing stock. But this is something that may be killed: the Treasury responded in October by raising the interest rate chargeable to local authorities.
Thanks to benefit changes, the period of depressed wages has been made worse for people on lower incomes.
First, there has been a general cut in the generosity of state benefits. There are 6.8m working-age claimants of various sorts. To take one illustrative example, the expected basic benefit income paid to adults under some of the schemes has dropped from £76.97 per week to £70.42 in real terms since 2010.
Some cuts were very pronounced, direct and deep. In 2017, new benefit claimants who were deemed not fit for work but healthy enough to do “work-related activity” – such as preparing a CV or training – had their expected incomes cut from £102.15 to £73.10 per week.
Second, claimants have endured a long run of botched benefit reforms. The introduction of the Personal Independence Payment and the Work Capability Assessment, a check on people claiming ill-health benefits, placed extraordinary and needless strain on people with disabilities.
But the mother of them all is still being rolled out. Universal Credit is replacing six other benefits. It appears to be cursed. In 2011, the government expected to have 8 million people claiming UC by the end of 2017. They got nowhere close: the real figure is currently around 2.5 million.
But the slowness is not the problem. It is the fragility of a system that is supporting some of the most vulnerable people in our society. The NAO, which scrutinises Parliament’s spending, found that 16 per cent of claimants are paid late – and that “it usually takes around 5 weeks to get your first payment”.
Labour has said it would make “emergency” reforms, pending a full redesign of the system. They would remove parts of it that have caused significant distress – notably, a cap on the number of children for whom parents can claim support. But they have not really set out any plans for replacing Universal Credit.
This primer highlights lots of areas that need more money. There are other things that look hard to fix without money, too. Look under rocks, and things look tougher and tougher to sustain without serious spending. Take prisons, for example.
Both parties have said that they will aim to have current spending (day-to-day costs) covered by taxation. In the political parlance, they would only borrow money on top of that “to invest”. But both of them intend to increase investment dramatically. There will also be a lot of talk in this election of infrastructure.
Sajid Javid, the Tory chancellor, has said that the “first priority of our new economic plan will be to rebuild our national infrastructure”. He has proposed a “cap” on capital spending to permit extra investment in infrastructure – closing the gap with Labour’s longstanding proposals for a significant boost.
This would be a huge change for Britain – moving from being a small spender on infrastructure to being a generous one.
What about that current spending, though? That is the budget that makes hospitals work, pays for teachers and covers the benefits bill.
It had looked as though there would be a lot of headroom: projections suggested that, in three years’ time, total tax receipts would exceed day-to-day spending by £37 billion. But about £15bn of that has gone already, promised away in September. And revisions have taken away another £18bn. So what is left is very meagre indeed.
Any extra spending will mean a tax rise. Britain, at the moment, is a mid-range country on tax take. It is certainly possible to raise the burden some way, as a point of economics, even if not as a point of politics.
How, then? Corporate tax rates are quite low. While tax rates on rich people are quite high, the “tax wedge” is not. This is a measure of the proportion of total renumeration spending by employers that goes to the state for a median worker.
The truth is that, unless we are willing to borrow a lot more, we will require broad-based tax rises on lots of people – because that’s where the money is. Labour has previously stated, in 2017, that they wanted to raise tax on only the top – the 1.3m people with incomes over £80,000. But that is a really difficult way to raise money.
To give you a sense of scale, here are some HM Revenue and Customs estimates for the yield from raising taxes which usually fall on the rich by pretty chunky amounts:
- Raise the highest rate of income tax by 5 per cent (from 45 per cent): £1.1bn in 2023
- Raise inheritance tax rate by 10 per cent (from 40 per cent): £1.4bn in 2023
- Raise capital gains tax rates by 10 per cent: £300m in 2023
The real money comes when you take a little bit of cash (or a lot) from a lot of people:
- Raise corporation tax by 1 per cent (from 19 per cent): £3.1bn in 2023
- Raise the basic rate of income tax by 1 per cent (from 20 per cent): £5.6bn in 2023
- Raise the basic VAT rate by 1 per cent (from 20 per cent): £7bn
Labour has previously said that it wanted large corporation tax rises – about £20bn worth. But you shouldn’t take tax pledges in an election campaign as gospel. Big changes are hard to figure out or cost when you don’t have the benefits of a Treasury to do the hard work.
Illustrations by Waldemar Stepien