The Budget Part II

Our world seems to be speeding up and getting less coherent. Probably it was always incoherent, but we were once led to believe that it was generally in good order and fit for purpose, to use the words of the urbane ‘home counties’ villain in the BBC’s Sunday night thriller The Night Manager.

For example, we used to have one annual budget, which was an occasion that had all the slow moving circumstance that led you to believe its contents had been marinated in the ancient juices of the stately British constitutional process that somehow made annual budget policy changes appear apt and wise even if some chancellors were evidently pickled in gin and tonic. Selwyn Lloyd comes to distant monochrome recollection. We then still lived largely in that long post-Edmund Burke world when we thought that institutional processes were wise because they had long been done in long established ways.

Wednesday’s budget appears to have been the third in three months, in a feat of government productivity that will, we all hope, serve as an example to British industry, where labour productivity seems incapable of lifting itself from the heap into which it collapsed some years ago (and where it now lies, insensible to all rational economic hope and seemingly unresponsive to all economic persuasion and remedy).

Budgets, in my experience are seldom events that should tempt you into immediate stock-market action. That is because they are designed to be artful and dissembling to fit the incumbent chancellor’s crafty political agenda. Mr Osborne was, it seems, bearing our children and grandchildren in mind. As they quickly say when commercial radio contractual product and service offers are made, “terms and conditions apply”. In other words, read the small print.

Everyone knows that budgets are never quite the same the day after they have been delivered – with skilled wrangling and the sleight of hand of a persuasive magician – and after commentators have had time to go through the small print in the Red Book (not the Little Red Book that the shadow Chancellor flung across the dispatch box to the actual Chancellor last November).

Yesterday’s budget event was no exception to that general experience. It seemed in basic principle to be bad news for highly indebted loss making companies because the Chancellor, quite reasonably, seeks to limit the amount of past losses that companies can write off against future profit and the amount of debt interest that companies can automatically offset against annual profits. However, one knows that you should not take popular fiscal measures like that at face value. It will probably not be until next week that the precise workings of such schemes seep into the domain of general public knowledge and understanding.

Budgets do, however, give a useful litmus test to long-established received economic truths about the associations between budgetary measures and economic responses. This March, it was a test of the link between GDP pay and productivity.

One of the important budget facts that has now clearly emerged is that the OBR (Office of Budget Responsibility) felt professionally obliged to shrink its earlier UK economic forecasts, used by the Chancellor last November, not so much because of global threats to Mr Osborne’s previous plans but more because it had reforecast its estimates of the aforementioned British productivity gains – or the lack of them. In addition, it downgraded its associated forecast estimates of pay increases in the UK over the next four years.

That is to say, a further assessment and estimates based on the latest productivity statistics, shows that the UK labour market is showing no signs of changing for the better, either in terms of per capita income or levels of employee productivity. The OBR offers a perceived and forecast downward trend which in its chronic persistence bodes ill for general economic prospects, domestic equities and government economic management. To put it bluntly, if the national income does not buck up, taxation increases will look unavoidable at some point if the Chancellor still wishes to balance the books by the next general election, in which the Chancellor seems to have a personal political interest. Or putting the observation another way, there is a limit to the degree to which one may reasonably shrink government resources and still have a sustainable nation-state.

Productivity, or rather the lack of it, is now the big problem of the UK economy. (It is also a challenge in the US.) It is also its biggest conundrum because, as far as one can tell, economists appear unable to adequately explain what is causing it. What is clear to me, is the historic fact that in days gone by productivity agreements between unions and employers were considered, negotiated and agreed when labour had from time to time, become too expensive a factor in production.

Now, labour is relatively cheap, for the following reasons: a) the rapid growth of UK working population in relation to the work available; b) the oncoming revolution in technology that devalues human labour; and c) the fact that companies – particularly manufacturing ones – now have alternative global labour markets on tap. How you solve that problem is the big question of our times; it does not seem the sort of cyclical adjustment which budgets are designed to cope with on a touch of the wheel basis. It appears to be too fundamental for that.

Furthermore, it shows that budgets may be getting too difficult because many of the old working economic assumptions are no longer reliable – at least not in the way they once were. It seems to be a general developed world problem embracing America and Europe as well as the UK. In the US Mr Donald Trump is a herald and expression of one solution: a more politically isolationist and economically protectionist USA – the kind of America that we have not seen since the days of the ‘Fortress America’ mentality, prior to the arrival of Franklin Roosevelt in the Second World War. The world is changing and Brexit enthusiasts should give that due consideration.

With regard to the departure of Iain Duncan Smith, that is one immediate outcome of the Budget that no one predicted. I accept that the two men may have fallen out of brotherly love some time ago and that such a resignation had been foreseeable for some time, but I still suspect that the Chancellor’s words against Brexit may have been the bear bodkin that stabbed him broad awake into action. After all, it does seem that as a member of the Cabinet, IDS had collectively agreed to the abolition of some of the disability allowances. Perhaps Iain Duncan Smith had come to the same view of Mr Osborne that the Marquess of Salisbury came to about Ian McLeod long ago: “too damn clever by half.”