For once it seems that the widespread reaction to a Budget was correct. Chancellors usually bury bad news in the detail of a Budget released long after their speech. However the dire electoral position of the Tories means that the main changes were announced with a flourish. The personal income tax rate threshold was raised to £10,500 a year, which the Institute for Public Policy Research has shown mainly benefits the highest earners. In addition, the annual amount of tax-free savings was boosted to £15,000 a year, which is actually close to the average (mean) disposable income in Britain. This was a Budget to shore up the Tory vote among higher earners and savers and staunch the defections to UKIP.
Osborne did nothing to address the economic crisis. This is not because the crisis is over or a self-sustaining recovery is underway. That is a dangerous delusion. Even the forecasts from Office for Budget Responsibility (OBR), which has proved to be significantly over-optimistic on growth since it was established, project only an annual average growth rate of approximately 2.5% over the next 5 years.
SEB has previously shown that a huge gap has accumulated between the current level of economic activity and the previous trend rate of growth. Even if 2.5% GDP growth materialises that gap will not close. At best it will not widen further. The poverty and misery arising from the current crisis will become embedded in the economy.
To arrive at its forecasts the OBR has made the following assumptions:-
- Wages will only rise half as fast as GDP growth
- Average real wages (after inflation) will not rise at all, yet
- Non-wage incomes (salaries, interest and rent) will rise sharply
- House prices will rise by over 30%, and
- Stock markets will rise by 27%
Fig1. OBR Projection of household debt
It is not necessary to enumerate all the ways in which this forecast might be proven wrong, if for example there are increases in interest rates or inflation picks up because the currency falls, and so on. The key point to note is that for most people the crisis will be an enduring one, at least a decade long.
The crisis will continue because its root cause has not been addressed. Currently the fall in investment is approximately three times as large as the entire fall in GDP since the begnning of 2008. Investment has fallen by £58bn and GDP is still £21bn below its previous peak in the 1st quarter of 2008.
In fact, while GDP inches ahead in the longest-ever recession, investment (Gross Fixed Capital Formation) continues to decline. In addition, as the statisticians refine their understanding the most accurate position, the data for investment has mainly been revised lower. This is shown in the chart below (Chart in the OBR data).
Fig. 2 Business investment & its revisions
Fig.3 Total investment as % of GDP in industrialised countries
Meanwhile, minimal wage growth, rising household debt and the investment slump are all related. It is impossible to create new, high-skilled high pay jobs without investment. The government can boast that one million jobs have been created in the last two years. But less than half of these have been for full-time employees and many of those are on zero hours or minimum wages. In order to finance any increase in spending at all, workers whose real wages are falling are obliged to drawn down savings or take on new debt.
This is the mess that the Tories will bequeath to Labour. Only a thorough break from the policies of austerity can solve it.