Pragmatism was a key watchword of Philip Hammond’s first conference speech as chancellor. He reiterated his intention to abandon the strict fiscal rules of his predecessor. He also announced new spending on housing and other infrastructure.
Yet, despite the talk of policy change, his speech continued to repeat the same mantra of fiscal consolidation and balancing the budget. It lacked the vision and content to deal with the deep-seated problems of the UK economy.
Despite his attempts to insist otherwise, Hammond’s speech was more ideological than pragmatic, and again revealed the flaws in current macroeconomic policy in the UK. The chancellor’s rhetoric may have softened, but his commitment to an ideologically-driven agenda of austerity remains in place.
The need for change
The chancellor was eager to give the appearance of change. He wanted to signal that a different approach is needed to match the new circumstances in which the world finds itself. He was careful not to criticise his predecessor, though his move to a looser fiscal policy is a clear sign that previous policies are unfit for the present and future.
The commitment to achieving a budget surplus by 2020 – a much prized target of George Osborne – has been the most high-profile goal to be abandoned. In truth, this target was always arbitrary. It had no proper basis in economic theory and its pursuit has come at the expense of slower growth. Hammond’s move to a more pragmatic policy is an admission of the folly of his predecessor’s fiscal rules.
Yet, if the chancellor’s speech is anything to go by, the change in fiscal policy is likely to be too modest to make much of a difference to the UK economy. The announcement of extra borrowing of £2 billion to speed up housing construction is hardly a game changer. This investment will address neither the acute housing needs in the UK nor the lack of investment in the wider economy.
The problem here is the lack of ambition. Hammond rightly noted that infrastructure is important for the productive capacity of the economy but he fell short of the spending commitments needed to make it work to that effect.
The timidity of Hammond’s spending commitments highlight the lack of vision at the heart of his economic strategy. The impression is that ideology is still ruling economic policy, preventing the necessary investment in the UK economy that could help to secure a more sustainable recovery.
With low interest rates, the government should be borrowing to invest, not relying on the confidence fairy to magically restore investment.
There were also important things that Hammond missed out in his speech. There was talk of record levels of employment, but nothing on the slump in real pay that has harmed many millions of UK workers. The unprecedented drop in real pay has placed restrictions on aggregate demand and is a key reason why economic growth has been subdued. There was also nothing in his speech about the large trade deficit, despite its negative effects on economic growth.
Reference was made to lagging productivity in the UK but there was no clear solution on offer beyond rhetoric on improving skills and education. Hammond exhorted industry to invest more, but this was not underpinned by any plan to unlock the money within businesses and divert it to productive investment. Issues of short-termism and corporate governance (including workers on boards) were also missing.
Predictably, Brexit loomed large in Hammond’s speech. But, as in other speeches at the Conservative conference, Brexit acted as a smokescreen to deflect attention away from the home-grown problems of the UK economy. This diversionary tactic can only go on so long. It is imperative that attention be given to the need for reform within the economy as UK leaders talk about what a post-Brexit UK will look like. The connected problems of low pay, low investment, and low productivity require a coordinated approach that goes beyond the austerity policies sadly reiterated by Hammond in his speech.
Ideology wins again
The renewed talk of pragmatism in UK macroeconomic policy has a rhetorical appeal, but beneath the surface there remains a continuity in the policy stance of the current government. The ideological bias against deficit spending remains deeply-rooted and there is still no genuine commitment to rebalancing the economy away from household consumption towards investment. The personnel and rhetoric may have changed, but the supporters of austerity remain in charge.
A truly pragmatic macroeconomic policy would entail a wholesale reversal in fiscal policy and a resolve to invest for the long term. In this case, it would seek to challenge the established policy and political consensus in the UK.
Lamentably, as Hammond’s speech underlines, the UK still awaits an economic strategy that can improve the fortunes of the economy. We are all poorer for the absence of such a strategy.