In 2010, George Osborne became Chancellor and immediately began to establish his vision for the future of the UK economy. The economy he inherited was far from healthy, the effects of the 2008 financial crisis and subsequent downturn lingered. In his first budget, a bold and ambitious plan was presented.
Osborne had identified fundamental weaknesses in the UK economy. Increasing investment, improving productivity, reducing the hegemony of financial services as a large source of tax revenue for the UK and shifting away from growth heavily reliant on consumer spending to one which was export led, became the intended model. At the heart of this long-term plan was a sincere attempt to balance the budget which had dramatically risen thanks in part to a combination of bank bail outs, decreasing economic output and the effects of automatic stabilisers (i.e. increased unemployment benefits) in the aftermath of the financial crisis.
In his first budget, the Chancellor put forward the aim of achieving a balanced budget (where tax revenues equal expenditures) by 2014. Yet six years on and our economy remains in a precarious position. By March 2016, the Office for Budget Responsibility forecast a small surplus in 2020. Now, just four months later, the prospect of Brexit has plunged the UK into a period of uncertainty and Osborne has abandoned any hope of achieving a budget surplus by the end of this Parliament. Even as the deficit has fallen, overall debt as a percentage of GDP has continued to rise. His economic strategy has failed.
Through the years we have rarely seen the strategy achieve the desired early goals of the Chancellor. This is in large part due to sluggish productivity growth. Had trends continued at the same rate as the years prior to the crash, then we would expect workers to be 15% more productive than they are today, which would have generated huge gains for our economy.
Wages have not fared much better either. Real wage growth, which takes into account the rate of inflation has been falling for years, only beginning to rise again in 2014. This has left ordinary people facing a period of declining living standards, which has a knock on effect on their consumption which could otherwise stimulate growth.
UK trade continues to disappoint, with the UK’s current account deficit reaching record highs over the last few years. Economic growth in the UK is still heavily dependent on consumer spending.
A recent report by the Centre for Cities has shown that London generates a third of UK tax, almost as much as the next largest 37 cities combined, indicating that the vision of shared prosperity across the nation is far from being realised. This isn’t to say that there haven’t been flickers of hope in the UK economy over the past six years. Growth has returned, with the UK out performing many other developed nations. Employment records have reached record highs, which could be regarded as a great achievement, underpinned by flexible labour markets.
However, the structural issues posing a threat to long-term prosperity have not been properly addressed. This is not simply down to the Chancellor, as these problems existed prior to his time in office and in some cases before the 2008 crisis itself. However, it is increasingly clear that his strategy has not been able to deliver its original vision.
An ageing society requires a strong, productive and prosperous economy to sustain itself. To provide the best quality services for the population we must ensure that the economy is in good health. With the future uncertain, it is imperative that we shape the debate surrounding the future of the UK economy in a way which focusses on the root causes of our current predicament, and which offers bold and innovative solutions that can stimulate the growth and prosperity we are in desperate need of.
Over the next few weeks and months, we will be sharing our thoughts on what a future economic strategy might look like.
Research and Policy Intern