Can Britain help its own left-behinds?

Posted on November 22, 2016

As Britain’s chancellor of the exchequer prepares his first Autumn Statement this week, he is torn between three quite different priorities. One is the desire to stay true to the legacy rhetoric of the previous Conservative and Tory-Liberal Democrat coalition governments that it is imperative to reduce “eye-wateringly high” debt. (Although obsessing with fiscal consolidation has become wrong-headed as Roger Farmer explains — the deficit is within reason and the government’s cost of borrowing virtually zero.)

Then there is the poor state of UK productivity and skills, which Philip Hammond commendably highlighted in his party conference speech earlier this year.

Finally comes his boss’s clear priority, which will no doubt take precedence over all else. That is to do something for the “just about managing” families now widely if a tad dismissively abbreviated to “Jams”.

After my colleague Chris Giles’s sweeping overview piece last weekend, complete with marmalade metaphors, everyone else seems to have piled in with identical imagery and similar analysis.

But Giles really says all that needs to be said about why it looks impossible for the chancellor to make good on the hopes raised by Prime Minister Theresa May on the steps of 10 Downing Street when she took office. Giles highlights two points that overshadow all else.

First, the Jams are so numerous — about 10m — that any handout of more than a negligible amount will be expensive. Very expensive: “A measure raising the income of such adults by £1,000 would cost £10bn annually, for example. And to the extent that Brexit will make Britain poorer, there is almost no way the government can insulate the Jams from the pain.” (The forecasts are that the cost of Brexit to the economy will impair the public finances to something like £100bn over the next five years.)

Second, the people the prime minister has promised to help are precisely those set to take the biggest hit in the years ahead from the benefit cuts bequeathed to May and Hammond by their own former colleagues in government.

This is borne out by the Resolution Foundation’s sterling work in a recent report on the economic situation of the Jams. Their chart below shows the Jams are worse off economically than 12 years ago when taking housing costs into account. Even before housing costs, they have seen no income growth over the past decade.

And there is worse to come. The report calculates that tax and benefit policies already announced for this parliament will benefit the richest half of households and hurt the poorest half — and hit harder the lower down the income distribution you go.

The Resolution Foundation report offers some clever ideas for policy changes that can bring the government’s actions a little bit closer to its words. Its proposals for undoing planned cuts to the new universal credit in-work benefits are worth listening to. But there is no getting around that this will cost money at a time when the cupboard looks a lot more bare than it did before the EU referendum.

That means the government should also look very hard for measures that could address more than one of its three goals at once. One such policy would be to push harder on the wage floor policy introduced by George Osborne (perhaps by speeding up its increase towards the target, or expand it to those younger than 25). The wage rises this leads to would help the Jams a lot — in fact this is already happening, just one year after the policy’s introduction. Just as important, there is reason to think that weaning the British economy off its reliance on cheap labour could revive productivity growth by encouraging investment in capital and productivity-enhancing processes.

Another possibility, as the New Economics Foundation suggests among other sensible proposals, is to target its promised focus on infrastructure on the places that are most pervasively left behind.

No doubt this government’s biggest challenge is to manage Brexit. But it should not forget about the many domestic policy levers it has available to address some of the UK’s economic ailments — and which it has always had, regardless of EU membership, but has largely neglected to use.

Other readables

  • Dani Rodrik holds his economist colleagues partly responsible for Donald Trump’s victory. He argues that they have underplayed the negative sides of international trade liberalisations that they knew were in their models. Oversimplifying the science in order to highlight only the benefits of trade has lost the profession its credibility with the public.
  • Et in Arcadia ego: in the 2000s even famously egalitarian Japan saw increased wage inequality.

Numbers news

  • Support for EU membership has risen in most European countries — including Britain — since the Brexit vote, a new survey finds.

To receive Martin Sandbu’s Free Lunch by email every workday, sign up here.

You must be logged in to post a comment Login