From 2004 to 2019, the UK’s national output increased by 1.5 per cent a year. As employment went up by 0.9 per cent a year, the growth rate would have been about 0.5 per cent a year if employment had been constant. This is an unpromising background to the challenges that the UK faces from the Covid-19 virus and the economic damage it has caused – and also to the Spending Review just presented by Rishi Sunak, the Chancellor of the Exchequer. After all, a nation’s capacity to produce is fundamental to its ability to direct resources to public expenditure. The UK’s poor past performance on output warns that the Government must be careful not to make commitments it cannot afford.
But labour market developments imply that the prospects for the next fifteen years are worse than in the last fifteen. In the fifteen years to 2019, employment rose from 28.5 million to 32.8 million, or by 4.3 million workers. But the rise owed much to immigration, notably from the East European countries that joined the European Union at the start of the period. Non-UK-born employment climbed in the fifteen years to 2019 by no less than 3.1 million, while employment of the UK-born advanced only 1.2 million.
Looking ahead, Brexit presumably means that immigration from the EU will be at a lower level than before. It may even be reversed as living standards and wages in Eastern Europe catch up with those in Britain, and some workers of East European origins return home. Meanwhile the number of UK-born people of working age will be more or less flat over the next few decades. Unless something remarkable is about to happen, national output will be limited to the increase in productivity. To repeat, that has been only 0.5 per cent a year for quite a long time.
Suppose that the Government boosts its spending by, say, 2 per cent a year in the context just described, where output is subject to adverse demographic and productivity trends. Then over time the share of government spending in national output will climb remorselessly. Over a decade, the ratio of government spending to output would in fact rise by 16 per cent. The UK had a large budget deficit even before Covid-19 hit our economy and society. In other words, if the Government is intent on raising its expenditure by 2 per cent a year, it may eventually have to make some very unpopular announcements. To prevent the deficit running out of control and to stop the public debt exploding, taxes would need to rise over a decade by about a sixth.
None of the above is particularly complex. The facts on productivity and immigration are well-known. Undoubtedly, working-class voters for the Conservatives at the 2019 general election were partly motivated by disillusionment with a Labour Party which wanted the UK to remain in the EU with its open borders and single labour market.
Now is a time when caution and restraint over public expenditure ought to be the watchwords of the political elite, regardless of party allegiance. Unfortunately, Mr Sunak has other ideas. To quote a key passage in the Spending Review 2020 document:
‘The government has kept capital spending over the forecast period as set out in Budget 2020, consistent with delivering the highest sustained levels of public sector net investment as a proportion of [gross domestic product] since the late 1970s. For core day-to-day spending after 2021-22, the government has maintained the assumption of 2.1 per cent real terms increases per year made at Budget 2020.’
Will taxes be higher in 2024, when – if it lasts that long – the present Government faces the next general election? Unless the public finances are to be allowed to deteriorate drastically in the meantime, the answer has to be ‘yes’.
Photocredit: ©UK Parliament/Jessica Taylor