Ever since Boris Johnson won a landslide election victory in December, the first Budget on his watch had been highly anticipated. Johnson’s promise was to “level up” and “unleash the pent-up potential” of the UK. The Budget was the first chance to prove whether he could match his rhetorical switch away from Brexit and austerity with actually reprioritising how the state wielded its greatest instrument of power. Despite being overtaken by events — the response to coronavirus has come centre stage — that has remained the key question.
This is because, Westminster patois aside, “levelling up” is an important agenda that is shared by most other countries, which also suffer from under-investment, regional disparity and slowing productivity growth. As Sebastian Mallaby has put it, the Budget is a test case for whether a government can “transform a cause of populism” — economic pessimism — “into a tool for fighting it”. If the government manages this, it will leapfrog many other western countries that are on their way to figuring out how to achieve the same thing.
Regional disparity is, as I have written before, the economic problem tearing western countries apart. Free Lunch readers will know that strategies exist to address this challenge, but they are hard to pull off.
So this Budget matters more than your run-of-the-mill Budget, and it matters far beyond Britain. Against these yardsticks, how did chancellor Rishi Sunak’s announcements perform?
There is no doubt about the change in priorities, nor about the scale of that change. This government is not just ending austerity, it is murdering it and covering up the body. Its spending on consumption and investment will be 3 percentage points higher as a share of the national income by the end of the parliament, according to the Office for Budget Responsibility, the government’s independent public finance watchdog. This is partly offset by savings elsewhere, but it is largely financed with borrowing. The overall direction is incontrovertible: total government spending, which the Conservatives have spent a decade cutting, is set to go up from 39.3 per cent of national income in 2018-19 to 40.8 five years later (see chart below).
That is a bigger role for the UK state in the economy than it ever played for decades before the collapse in national income during the global financial crisis. Previous Conservative governments were set to bring that percentage share back to the high 30s. Under Johnson, the Conservatives have rallied behind the more statist type of economy more common on the European continent.
But does this make for levelling up? Beyond the rhetorical flourishes and crowd-pleasing handouts — such as the £5,000 giveaway to small pubs — the government has not gone out of its way to show that its measures will substantially reduce the productivity gap between the regions. First, the government’s main case is that it will spend a lot on infrastructure and connectivity, especially roads, and that this will help the left-behind parts of the country. A smaller sum set aside for local public transport improvement is particularly promising. Second, there are measures to direct research spending and more civil servants to places outside of London. Finally, new spending on education could have the effect of redistributing resources more towards the relatively poorer regions.
On all three counts, the government has a plausible case. But not a convincing one. Details of the planned infrastructure investments will have to wait for the publication of a delayed infrastructure plan. And, as a thorough report by the Resolution Foundation points out, Britain has a poor record on managing public investment. Money is not everything — it also has to be spent well — and even the new boost will only put the UK at the average rate of public investment among rich countries. Directing research spending to left-behind areas can work, but it is not clear that the government is earmarking enough of its increased research spending to geographical levelling up. On education, too, one wants to see the details of where the money will be spent, not just on what (the headline measure was £1.5bn of capital spending on further education institutions).
Meanwhile, the government shows no indication of wanting to reverse its own cuts to local government budgets, which have hit extremely unevenly across the country.
The best-laid plans of mice and men go oft awry. The Budget comes against a gloom-inspiring background — even before the coronavirus, the UK economy had largely stalled, recording no growth at all in January. In addition to the longer-term shift to spending more, the government on Wednesday committed up to £12bn of short-run spending on coronavirus measures, all of which seem smart, yet the shock could still hole the public finances below the waterline.
On the long-term vision of this government, all we can say is that the direction seems right, and this first delivery is far more ambitious than what we can say about other European countries. So, the UK government may be putting its money where its mouth is — but the jury is still out on whether that will get anywhere close to achieving what is needed.
Other readables
• In record time, economists Richard Baldwin and Beatrice Weder di Mauro have edited an ebook on the economics of coronavirus and epidemics — a handy resource for our times.
• Weder di Mauro and several other of Europe’s pre-eminent policy economists have also issued an urgent call for a European catastrophe relief plan.
Numbers news
• The FT has everything you need to know about the UK Budget.
Source: Economy - ft.com
