tag:theconversation.com,2011:/us/topics/uk-budget-2015-15437/articlesUK Budget 2015 – The Conversation2015-07-23T01:16:08Ztag:theconversation.com,2011:article/447662015-07-23T01:16:08Z2015-07-23T01:16:08ZWage policy ‘coup’ marks debasing of politics by hyper-democracy<figure><img src="https://images.theconversation.com/files/88646/original/image-20150716-5099-130a0zg.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In a hyper-democracy the headlines are always hot. </span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/stevenritzer/8558259610/">Steven Ritzer/flickr </a>, <a class="license" href="http://creativecommons.org/licenses/by-nc-nd/4.0/">CC BY-NC-ND</a></span></figcaption></figure><p><em>This article is part of the <a href="https://theconversation.com/au/topics/democracy-futures">Democracy Futures</a> series, a <a href="http://sydneydemocracynetwork.org/shortcodes/images-videos/articles-democracy-futures/">joint global initiative</a> with the <a href="http://sydneydemocracynetwork.org/">Sydney Democracy Network</a>. The project aims to stimulate fresh thinking about the many challenges facing democracies in the 21st century.</em></p>
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<p>One of the most significant challenges for democracy has always been the question of expectations. Promises are made at election time but realities clash and expectations of popular change are dashed as policies lie undelivered.</p>
<p>In many ways this is the nature of the system. In his book <a href="http://foreignpolicy.com/2013/10/17/the-confidence-trap/">The Confidence Trap</a>, David Runciman <a href="https://books.google.com.au/books?id=8oCSBQAAQBAJ&pg=PA204&dq=limits+of+growth+and+dampen+expectations?&hl=en&sa=X&ved=0CCoQ6AEwAmoVChMItZfZhsPtxgIVyiaUCh1uGwYM#v=onepage&q=limits%20of%20growth%20and%20dampen%20expectations%3F&f=false">argues</a>:</p>
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<p>Could any democratic politician be expected to point out the limits of growth and dampen expectations of continued expansion in living standards? Democracies need to believe in a better future in order to function; politicians need to champion a better future in order to get elected.</p>
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<p>Sometimes, however, politicians appear to intentionally agitate public euphoria in order to destroy their political opponents, with little concern for the damage they might be doing to democracy. The trick is to mislead the media about an intended policy announcement and send the opposition down a rabbit hole preparing stock responses to tailored policy announcements – only to do something completely different. </p>
<p>Regardless of whether the policy might be workable in practice, the result invariably stirs the public; the skilful politician wins the headlines and leaps up in the polls. Democracy seems renewed, sensationally so.</p>
<h2>Out of the blue, a living wage policy</h2>
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<a href="https://images.theconversation.com/files/89251/original/image-20150722-20188-uycc0k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/89251/original/image-20150722-20188-uycc0k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/89251/original/image-20150722-20188-uycc0k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=748&fit=crop&dpr=1 600w, https://images.theconversation.com/files/89251/original/image-20150722-20188-uycc0k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=748&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/89251/original/image-20150722-20188-uycc0k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=748&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/89251/original/image-20150722-20188-uycc0k.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=940&fit=crop&dpr=1 754w, https://images.theconversation.com/files/89251/original/image-20150722-20188-uycc0k.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=940&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/89251/original/image-20150722-20188-uycc0k.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=940&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
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<span class="caption">Chancellor George Osborne won headlines by announcing that Britons aged over 25 will enjoy a mandatory living wage from next year.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/altogetherfool/3543137666/in/photolist-6p6vos-79M7PF-7ay5en-edu6sX-CCRWd-7QHnGi-mTYY8B-dXe6Wo-pJnZP6-5BkMTc-8SgQa5-CCQPm-79APv9-6p6wPC-bCTJAT-6p2qB8-8v1H4M-aAU5wB-6p2qNi-79QXUq-79APuY-6p6z25-7aBTrs-7QLFcA-77gpz1-79QXmE-nXYQbh-8KHuzh-di9QWE-w1f8VN-79APvU-79APvE-79APuL-6poyn7-6p2nkr-6p6xWm-di9QVG-hirce8-dm4xwY-8RRo4A-8SjXbE-nX6yK9-nY33ax-dhNkTS-nY4JiW-8RRo4s-ofgoUi-ofv7tA-odwba7-ofv785">flickr/altogetherfool</a>, <a class="license" href="http://creativecommons.org/licenses/by-sa/4.0/">CC BY-SA</a></span>
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<p>In the UK, one such announcement has just been <a href="http://www.theguardian.com/uk-news/2015/jul/08/budget-2015-uk-gdp-other-rich-nations-george-osborne">made</a>. In his first post-election speech, newly re-elected Chancellor George Osborne pulled a proverbial rabbit out of the fiscal hat by declaring, seemingly out of the blue, the introduction of a National Living Wage. </p>
<p>The <a href="https://theconversation.com/budget-2015-living-wage-offers-rabbit-out-the-hat-but-magic-will-be-needed-later-44372">“living wage”</a> is a progressive concept championed by a coalition of trade unions, community groups and relatively marginal Labour and Green politicians over the past decade. The aim is to raise the wage employers pay directly to workers to a level that allows them to enjoy a basic quality of life.</p>
<p>In 2014, the Living Wage Foundation – a UK-based pressure group lobbying for private firms to voluntarily pay living wages – <a href="http://www.livingwage.org.uk/calculation">calculated</a> it to be £7.85 per hour (or £9.15 in ultra-expensive London).</p>
<p>Given how the living wage has become a hallmark of innovative left-wing thinking on <a href="http://www.theguardian.com/commentisfree/2013/jun/12/reinvigorate-centre-left-predistribution">“predistribution”</a> since the turn of the decade, its apparent introduction by a chancellor previously branded as an elitist, staunch advocate of austerity politics was nothing short of a media and public <a href="http://www.theguardian.com/media/greenslade/2015/jul/09/what-the-national-newspapers-think-of-osbornes-summer-budget">sensation</a>.</p>
<p>But what if this is read as a manoeuvre of cynical statecraft politics? The budget announcement will most likely further strengthen the Conservative government’s position in power and blunt any real opposition. By introducing such a hallmark progressive policy without warning (least of all in the Conservative manifesto), Osborne succeeded in tripping up his political opponents while simultaneously gaining widespread media appraisal.</p>
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<img alt="" src="https://images.theconversation.com/files/88638/original/image-20150716-5080-1dwwur3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=237&fit=clip" srcset="https://images.theconversation.com/files/88638/original/image-20150716-5080-1dwwur3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=764&fit=crop&dpr=1 600w, https://images.theconversation.com/files/88638/original/image-20150716-5080-1dwwur3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=764&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/88638/original/image-20150716-5080-1dwwur3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=764&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/88638/original/image-20150716-5080-1dwwur3.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=960&fit=crop&dpr=1 754w, https://images.theconversation.com/files/88638/original/image-20150716-5080-1dwwur3.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=960&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/88638/original/image-20150716-5080-1dwwur3.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=960&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The front page of The Sun hails the UK budget announcement.</span>
<span class="attribution"><span class="source">The Sun</span></span>
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<p>More importantly, the policy itself is counter-balanced by a string of cuts to social security payments including tax credits (subsidies that top up low wages), student maintenance grants and housing benefits. So though poorer people are hit harder by cuts to vital benefits, this is shrouded by an increase in basic wages.</p>
<p>How will this political strategy affect British democracy? The announcement has been almost universally and instantly popular. Even <a href="http://www.theguardian.com/commentisfree/2015/jul/08/george-osborne-budget-stole-labours-election-promises-living-wage">The Guardian</a> acknowledged the chancellor’s guile.</p>
<p>So on the one hand, especially if we employ <a href="https://en.wikipedia.org/wiki/Joseph_Schumpeter#Democratic_theory">Joseph Schumpeter’s</a> basic definition of democracy as elite rule by popular politicians, it seems very democratic. Closer inspection of the policy, however, reveals that it is not nearly as radical as Osborne has made it out to be.</p>
<p>The <a href="http://www.theguardian.com/politics/2015/jul/08/fist-pumping-iain-duncan-smith-george-osborne-living-wage-budget">actual level</a> of pay will start at £7.20 in 2016 and rise to £9 per hour by 2020, falling short of the Living Wage Foundation’s calculation. When this deficit is coupled with the forthcoming welfare cuts, it becomes clear that the policy barely scratches the surface of the UK’s <a href="http://www.theguardian.com/business/2015/jul/09/living-wage-will-leave-tax-credit-claimants-1000-worse-off-says-ifs">standards-of-living crisis</a>.</p>
<h2>Dashing hopes fuels public distrust</h2>
<p>What will happen when people come to realise that Osborne’s policy does not warrant the media’s euphoric reaction? Expectations of a genuinely “high wage” economy and improved standards of living are already building.</p>
<p>Unfortunately, such hopes will soon be dashed by the <a href="https://theconversation.com/osbornes-living-wage-wont-spare-low-income-families-from-cuts-44438">swingeing cuts</a> to tax credits and the disembowelment of public services over the next five years. At the very least, any improvements will likely fall far short of what the Living Wage Foundation has campaigned for over the past decade.</p>
<p>And the result? Probably an even greater entrenchment of the cynicism and distrust in politicians that pervades liberal democracies throughout the Western world. More than ever we need to recognise how risky these “policy surprises” and moments of false euphoria are for the long-term health of our democratic ideals.</p>
<p>The hidden risk behind this political approach is that it encourages what might be called <a href="http://www.tandfonline.com/doi/abs/10.1080/07393148.2015.1056431#.Vadjv864l-U">hyper-democracy</a>. The concept of hyper-democracy captures the intensification of a corporate-political game, with fake popularity and even faker policies. </p>
<p>Such a situation does not mean that there is too much democracy. Rather, democracy takes on the characteristics of a malicious simulation in which media and political elites artificially create winners and losers in the daily news cycle. When popularity tricks are applauded and admired (much like Osborne’s announcement), when spin matters more than substance and when the public is ultimately left in the dark about the true intentions of political actors, democracy becomes a parody.</p>
<p>Like a drama or a comedy, or the latest box set of <a href="https://en.wikipedia.org/wiki/Veep_(TV_series)">Veep</a> (itself a brilliant satire of precisely this kind of politics), this parody denigrates the very ideal of democracy. It creates an image of democratic politics that is bound to disappoint and diminish our hopes of what politics can be.</p>
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<img alt="" src="https://images.theconversation.com/files/88637/original/image-20150716-5089-y6x3zu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/88637/original/image-20150716-5089-y6x3zu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=337&fit=crop&dpr=1 600w, https://images.theconversation.com/files/88637/original/image-20150716-5089-y6x3zu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=337&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/88637/original/image-20150716-5089-y6x3zu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=337&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/88637/original/image-20150716-5089-y6x3zu.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=424&fit=crop&dpr=1 754w, https://images.theconversation.com/files/88637/original/image-20150716-5089-y6x3zu.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=424&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/88637/original/image-20150716-5089-y6x3zu.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=424&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">The comedy and drama behind HBO’s Veep is part of our political reality today.</span>
<span class="attribution"><span class="source">HBO</span></span>
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<p>By contrast, <a href="http://jpart.oxfordjournals.org/content/18/4/543.short">research shows</a> that the most effective policies tend to be those that have been introduced gradually and constantly maintained and developed in collaboration with the citizens they affect. It’s the “slow boring of hard boards”, as <a href="https://en.wikipedia.org/wiki/Politics_as_a_Vocation#Summary">Max Weber</a> would have it. This isn’t to say that the democratic politics of hard boards can’t be enthralling, as long-strived-for ideals such as universal health care or racial and gender equality are achieved through slow and incremental, yet meaningful reform.</p>
<p>But, at its worst, hyper-democracy centres on personality cults and media-driven ploys. As Tony Blair and Barack Obama have shown, this can be as much the case for progressive politicians as for Conservatives.</p>
<p>Hyper-democracy is pervasive and, sadly, it may well be that Osborne’s “living wage” episode in the UK turns out to be yet another example of its pull – the debasement of democratic ideals through acts that in themselves appear very democratic.</p><img src="https://counter.theconversation.com/content/44766/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Matthew Wood does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The out-of-the-blue move to a living wage in the UK exemplifies the ditching of methodical public policy processes for manipulative hype and spin, the ‘hyper-democracy’ that brings politics into disrepute.Matthew Wood, Postdoctoral Research Associate, University of SheffieldLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/392622015-03-26T06:33:56Z2015-03-26T06:33:56ZRevealed: how British voters’ political mood swings<figure><img src="https://images.theconversation.com/files/76006/original/image-20150325-14507-199959l.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Feels a bit too conservative, dear.</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/69125796@N00/7415541920/sizes/l">starmanseries/Flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>Since last year’s <a href="https://theconversation.com/autumn-statement-the-experts-respond-34833">autumn statement</a>, the electoral stars have <a href="http://cdn.budgetresponsibility.independent.gov.uk/March2015EFO_18-03-webv1.pdf">seemed to align</a> in the Conservative Party’s favour: inflation has remained low, unemployment has continued to fall, the economy has grown, and people’s <a href="https://d25d2506sfb94s.cloudfront.net/cumulus_uploads/document/v3nm8om9zh/YG-Archives-Pol-Trackers-Economic%20Worries-230315.pdf">sense of economic optimism</a> – so often the driver of government support in the past – has risen. Ed Miliband’s <a href="https://yougov.co.uk/news/2014/11/02/ed-milibands-approval-rating-sinks-all-time-low/">personal ratings fell sharply</a> after <a href="http://blogs.telegraph.co.uk/news/tobyyoung/100287467/ed-milibands-seven-weirdest-moments/">a series of gaffes</a> while <a href="http://www.theguardian.com/politics/2015/feb/14/opinium-poll-david-cameron-maintains-approval-rating">David Cameron’s ratings rose</a>. All has seemed set fair for a Conservative surge.</p>
<p>Yet despite these portents of electoral recovery and eventual victory, support for the Conservatives in the polls has risen slowly and fitfully. Even now, Labour and the Conservatives remain <a href="http://ukpollingreport.co.uk/uk-polling-report-average-2">neck-and-neck in the polls</a>.</p>
<h2>Not-so-austerity Britain</h2>
<p>The chancellor of the exchequer, George Osborne, has <a href="https://www.gov.uk/government/speeches/chancellor-george-osbornes-budget-2015-speech">presented the image</a> of a Britain that is “paying its way” and “walking tall again”. But beneath the bravado, one can hear the crashing of gears. Since <a href="https://theconversation.com/autumn-statement-the-experts-respond-34833">the autumn statement</a>, Osborne has significantly revised his programme of austerity. </p>
<p>In 2014, he <a href="https://www.gov.uk/government/speeches/chancellor-george-osbornes-autumn-statement-2014-speech">set a goal</a> of generating a surplus of £23 billion by 2019/20, and indicated that the programme of cuts would continue to 2019/20. He also <a href="http://www.economist.com/news/britain/21635617-george-osborne-makes-up-lack-giveaways-bold-tax-reform-tis-not-season">announced his intention</a> to reduce overall government spending to 35% of GDP. </p>
<p>Now, Osborne has shifted the goalposts, <a href="http://cdn.budgetresponsibility.independent.gov.uk/March2015EFO_18-03-webv1.pdf">predicting a surplus</a> of £7 billion by 2019/20. He also declared that the cuts would finish a year earlier in 2018/19. Overall government spending as a proportion of national income would return to 1964 levels. The significance of these revisions should not be overstated. Austerity has been reduced, not eliminated. Nevertheless, the revisions are politically important and prudent. </p>
<p>There are several reasons why Osborne revised his estimates. Part of it has to do with image: Cameron’s “<a href="https://www.gov.uk/government/speeches/chancellor-george-osbornes-budget-2015-speech">de-toxification</a>” of the Tory brand is still incomplete. Senior Conservatives are well aware that – in the eyes of many voters – they remain the “<a href="http://www.economist.com/news/britain/21590964-david-cameron-risks-worsening-his-partys-already-poor-reputation-nasty-party">nasty party</a>”. </p>
<p>Another reason is that Labour has been <a href="http://www.ft.com/cms/s/0/8c4cd33e-cd93-11e4-8760-00144feab7de.html#axzz3VJhFGcKU">on the attack</a>, conjuring images of a cash-starved NHS, and a return to levels of government spending not seen since the 1930s. This depiction was lent credibility, after the <a href="http://www.bbc.co.uk/news/business-30327717">Institute for Fiscal Studies warned</a> of “massive” cuts to come, and <a href="http://www.dailymail.co.uk/news/article-2859973/Cable-turns-Osborne-denounce-brutal-cuts-Business-Secretary-attacks-plans-cut-deficit.html">Vince Cable unhelpfully commented</a> that the proposed cuts would be “brutal”. </p>
<h2>The policy mood</h2>
<p>Yet the real reason for Osborne’s revisions is all too easily overlooked: it is simply that the electorate remains committed to the public services. And, what is more, it has moved significantly to the left since 2010.</p>
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<img alt="" src="https://images.theconversation.com/files/75850/original/image-20150324-17696-1c8bod9.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75850/original/image-20150324-17696-1c8bod9.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=854&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75850/original/image-20150324-17696-1c8bod9.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=854&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75850/original/image-20150324-17696-1c8bod9.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=854&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75850/original/image-20150324-17696-1c8bod9.JPG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=1074&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75850/original/image-20150324-17696-1c8bod9.JPG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=1074&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75850/original/image-20150324-17696-1c8bod9.JPG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=1074&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
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<span class="caption">Research illustrates the British public’s policy mood swings.</span>
<span class="attribution"><span class="source">NatCen/University of Essex</span>, <span class="license">Author provided</span></span>
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</figure>
<p>This leftward movement is summarised by the graph above, which displays the annual average left-right position of the electorate – in other words, the “policy mood” – since 1964. It is estimated using responses to hundreds of policy questions – relating to tax, spending, welfare, Europe and so on – that are asked in different years. These 5,300 responses are standardised and averaged <a href="http://www.cambridge.org/us/academic/subjects/politics-international-relations/american-government-politics-and-policy/tides-consent-how-public-opinion-shapes-american-politics">using an algorithm</a> devised by Professor James Stimson of the University of North Carolina. </p>
<h2>Thermostats and the policy mood</h2>
<p>The research suggests that the mood has generally moved in the opposite direction to policy: down to the right from 1964 to 1979, up to the left from 1979 to 1997 and down to the right again between 1997 and 2010. By 2014 the electorate had moved left again, returning to approximately where it was in 2005 – the year of Labour’s third successive victory. </p>
<p>This pattern of response – <a href="http://www.cambridge.org/gb/academic/subjects/politics-international-relations/comparative-politics/degrees-democracy-politics-public-opinion-and-policy">first identified</a> by Professor Chris Wlezien of the University of Texas at Austin – suggests the policy mood is like a “thermostat”. When it gets too cold (unemployment and inequality increase) it signals the need to turn up the heat (spend more). And when things get too warm (spending and taxes rise) it signals the need to turn the heat down (spend less).</p>
<h2>Back to the future</h2>
<p>The evolution of preferences provides a fascinating perspective on recent history. But it also tells us something about contemporary politics too. Although the mood in 2014 was at roughly the same level as in 2005, Labour is in a weaker position in the polls.</p>
<p>Labour’s less favourable standing may be because the party is perceived as being either further left, or less competent, than it was in 2005 – a legacy of the financial crisis of 2008. Alternatively, it may be because the Conservatives are further to the centre or more competent. Whatever it is, it is not because the electorate is more “right-wing” than in 2010 – the mood has demonstrably shifted left.</p>
<p>These findings should give Labour both heart and a warning: heart because they won in 2005. And a warning because, even in these more favourable circumstances, they received only <a href="http://news.bbc.co.uk/1/hi/uk_politics/vote_2005/frontpage/4519863.stm">36% of the vote</a>.</p>
<p>The final lesson is a more long-term one. If the Conservatives do go on to form the next government and continue with their programme of austerity and tax cuts, the electorate will continue moving left. The thermostat will signal a need to turn up the heat. This movement will contribute to the Tories’ eventual defeat. </p>
<p>If Labour forms the next government and prioritises spending, the electorate will move right. The thermostat will signal the need to cool things down. As I have <a href="https://theconversation.com/how-to-predict-the-outcome-of-a-general-election-36807">discussed before</a>, governments usually lose votes from one election to the next – the British public’s policy mood swings are undoubtedly a factor in this.</p><img src="https://counter.theconversation.com/content/39262/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Bartle has received funding from the Economic and Social Research Council and the British Academy.</span></em></p>The stage seemed set for a Conservative surge, but Britain’s changing policy mood got in the way.John Bartle, Reader in Politics, University of EssexLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/391002015-03-25T14:40:50Z2015-03-25T14:40:50ZFact Check: Is the north of England growing faster than the south?<figure><img src="https://images.theconversation.com/files/75727/original/image-20150323-17702-16yrgs2.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Has the north of England's economy lit up?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/47309173@N06/8040061240/sizes/l">96tommy/flickr</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><blockquote>
<p>Over the last year, the north grew faster than the south. </p>
</blockquote>
<p><strong>George Osborne, chancellor of the exchequer, in his Budget speech.</strong></p>
<p>According to the chancellor’s <a href="https://www.gov.uk/government/speeches/chancellor-george-osbornes-budget-2015-speech">Budget speech</a>, Britain is the “comeback country” enjoying the spring of “a truly national recovery”. The theme is familiar, as several of his speeches on the potential of plans for a “northern powerhouse” have highlighted high rates of economic growth and job creation in the north of England. Osborne’s claim that the north grew faster last year is surprising, as it has been widely noted that the economic recovery since 2009 has been led by London and the south-east and that these regions have proved to be more resilient. So does the claim stand up to scrutiny? </p>
<p>To test this we really need regional data on the value of output and employment for 2014. According to the Treasury, the key evidence behind the chancellor’s claim is <a href="http://www.ons.gov.uk/ons/rel/regional-accounts/regional-gross-value-added--income-approach-/december-2014/stb-regional-gva-dec-2014.html">data from the Office of National Statistics</a> on economic output for the third quarter 2013, which is the latest available. Gross Value Added (GVA) measures the increase in the value of the economy due to the production of goods and services and here it is based on the income generated by resident individuals and firms, including inflation. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/75722/original/image-20150323-17702-4t6fcl.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75722/original/image-20150323-17702-4t6fcl.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=623&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75722/original/image-20150323-17702-4t6fcl.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=623&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75722/original/image-20150323-17702-4t6fcl.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=623&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75722/original/image-20150323-17702-4t6fcl.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=783&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75722/original/image-20150323-17702-4t6fcl.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=783&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75722/original/image-20150323-17702-4t6fcl.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=783&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">Growth by region between Q3 2012 and Q3 2013.</span>
<span class="attribution"><a class="source" href="http://www.ons.gov.uk/ons/rel/regional-accounts/regional-gross-value-added--income-approach-/december-2014/stb-regional-gva-dec-2014.html">ONS Regional Gross Value Added (income approach) December 2014</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>This provisional data does show higher rates of growth of GVA per head in northern regions, although London’s growth is high and these small differences would take a very long time to close the very large regional differences in GVA per head. So there is some justification for the claim based on this measure, although it is for 2013 and not last year, or 2014 as he says in his speech. </p>
<p>We can gain a better picture by putting this snapshot in a longer-term context. The chart below shows the change in GVA per head within each region since the pre-recession peak in 2007. We can see that the upswing in northern regions in 2013 is actually part of their recovery from a deeper downswing than in London and the south-east. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/75723/original/image-20150323-17672-14g9vw3.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/75723/original/image-20150323-17672-14g9vw3.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75723/original/image-20150323-17672-14g9vw3.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=449&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75723/original/image-20150323-17672-14g9vw3.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=449&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75723/original/image-20150323-17672-14g9vw3.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=449&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75723/original/image-20150323-17672-14g9vw3.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=564&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75723/original/image-20150323-17672-14g9vw3.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=564&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75723/original/image-20150323-17672-14g9vw3.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=564&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">London remains ahead.</span>
<span class="attribution"><a class="source" href="http://www.ons.gov.uk/ons/rel/regional-accounts/regional-gross-value-added--income-approach-/december-2014/stb-regional-gva-dec-2014.html">ONS Regional Gross Value Added (income approach) December 2014</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>Consequently, the differences between regional GVA per head between 2007 and the third quarter of 2013 have widened slightly when compared to the national average. The lead of London and the south-east has increased slightly and the results for Wales are concerning. London has moved from 167.3% of the national average to 171.9% and the south-east from 108% to 110.5%. At the other end, the north-east has fallen from 86.1% to 85.2%, the north-west from 87.7% to 85.2% and Wales from 73.8% to 72.2%. </p>
<p>Do recent employment and jobs statistics provide more convincing support for the chancellor’s claim? The emphasis on growth in the north has apparently been based on employment from the Labour Force Survey. The most recent data shows the growth in employment over the year from November 2013 to January 2014 to November 2014 to January 2015.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/75725/original/image-20150323-17702-3aglny.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/75725/original/image-20150323-17702-3aglny.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75725/original/image-20150323-17702-3aglny.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=505&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75725/original/image-20150323-17702-3aglny.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=505&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75725/original/image-20150323-17702-3aglny.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=505&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75725/original/image-20150323-17702-3aglny.PNG?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=635&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75725/original/image-20150323-17702-3aglny.PNG?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=635&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75725/original/image-20150323-17702-3aglny.PNG?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=635&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Employment Growth by Region, 2014.</span>
<span class="attribution"><a class="source" href="http://www.ons.gov.uk/ons/rel/lms/labour-market-statistics/march-2015/statistical-bulletin.html">ONS Headline LFS Indicators for all Regions, March 2015</a>, <span class="license">Author provided</span></span>
</figcaption>
</figure>
<p>With the exception of the north-west, the divergence between London and the rest of the country stands out. While some northern regions are finally enjoying a rapid period of recovery this is not true of other northern regions which are still struggling to exceed their pre-crash level. Given that the trends in total jobs vary from year to year, and that recovery is not simultaneous, broad claims based on one year are not persuasive. </p>
<h2>Verdict</h2>
<p>We are not yet able to judge whether the regions in the north of England grew faster in terms of the value of their output last year (2014) as we haven’t got the data. Results for earlier years suggest this may have been the case. Employment data for 2014 show a jobs recovery in some northern regions, but substantial variations within both the north and south and continuing strong growth in London. What is clear is that the recession has intensified a pattern of uneven regional growth. </p>
<h2>Review</h2>
<p>There are two senses in which the chancellor’s comment could be said to be misleading – this article discuss both of them. The first, which seems relatively less important, concerns the timing of the economic data on which the statement is based. As this article makes clear, although the latest available data is not for “last year”, it does show faster annual per-capita growth in northern regions. </p>
<p>The second sense in which these figures could be misleading is as an indicator of the relative long-term performance of different parts of the UK. As the article discusses, broad claims about long-term growth based on one year of data are not persuasive. In particular, because the northern regions saw a deeper and longer recession than London it is quite possible that some of those regions are now seeing faster growth as they finally recover. <a href="http://www.centreforcities.org/wp-content/uploads/2015/01/Cities_Outlook_2015.pdf">Longer-term data</a> would suggest that large gaps in relative economic performance between north and south remain largely unchanged, or may even have been exacerbated by the recession.</p>
<div class="callout">The Conversation is fact checking political statements in the lead-up to the May UK general election. Statements are checked by an academic with expertise in the area. A second academic expert reviews an anonymous copy of the article.<br><br><a href="https://theconversation.com/factchecks/new">Click here to request a check</a>. Please include the statement you would like us to check, the date it was made, and a link if possible. You can also email factcheck@theconversation.com </div><img src="https://counter.theconversation.com/content/39100/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Peter Sunley has received funding from the Economic and Social Research Council.</span></em></p><p class="fine-print"><em><span>From 2007-2013, Henry Overman directed the Spatial Economics Research Centre which was core funded by the Economic and Social Research Council, Department for Business Innovation and Science, Welsh Government and Department of Communities and Local Government. From 2013, he has directed the What Works Centre for Local Economic Growth which is core funded by the same departments. Both these centres also receive additional government and research council funding.</span></em></p>In his budget speech, George Osborne claimed that the north grew faster than the south last year. Is he right?Peter Sunley, Professor of Economic Geography, University of SouthamptonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/391452015-03-23T14:36:00Z2015-03-23T14:36:00ZWhy the Jobcentre is not the best place for mental health support<p>Tucked away on page 60 of the <a href="https://www.gov.uk/government/publications/budget-2015-documents">Budget documents</a>, was a commitment to invest in mental healthcare for the working-age population. This is well warranted and long overdue – at any one time an estimated one in six of the working-age population is experiencing a mental health condition. </p>
<p>Mental illness is <a href="http://www.oecd-ilibrary.org/employment/mental-health-and-work-united-kingdom_9789264204997-en">estimated by the OECD</a> to cost the UK around £70 billion annually – roughly 4.5% of GDP. Costs are not only felt by the health system; the costs of lost productivity at work, unemployment and welfare benefits are also considerable. With an estimated <a href="http://www.oecd-ilibrary.org/employment/mental-health-and-work-united-kingdom_9789264204997-en">four out of ten new disability benefit claims</a> relating to mental illness, it’s clear that managing and preventing mental ill health is not just a job for the Department of Health. </p>
<p>The Budget measures focus on increasing access to evidence-based psychological therapies. This will be done in two ways: by providing online Cognitive Behavioural Therapy (CBT) to claimants of Job Seekers Allowance and Employment and Support Allowance, as well as users of <a href="http://fitforwork.org/">the new Fit For Work</a> (designed <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/181060/health-at-work.pdf">to support people</a> who are on long periods of sickness absence to stay in work); and co-locating NHS psychological therapy services in 350 Jobcentres across the country. </p>
<p>Given that waiting times for NHS psychological therapies (known as the IAPT programme in England), <a href="http://www.centreformentalhealth.org.uk/news/2014_demand_for_therapy.aspx">are reported</a> to be more than a year in some parts of the country, anything that improves access is good news. </p>
<p>So, this all sounds pretty positive – but what does the evidence say? </p>
<h2>From pilot to practice</h2>
<p>In 2014, the government commissioned a <a href="http://www.rand.org/randeurope/research/projects/psychological-wellbeing-work.html">report</a> to explore the evidence on what works in improving psychological well-being at work. Four interventions were recommended and pilots were then commissioned by the Department of Health and the Department of Work and Pensions to measure their effectiveness and to test their feasibility for national roll-out. </p>
<p>The interventions included the provision of online CBT with a vocational element within Jobcentres, and the integration of employment support (in particular, a model of supported employment known as Individual Placement and Support) with NHS psychological therapy for people with common mental health conditions. It seems likely that these two interventions influenced the Budget measures. </p>
<p>Unfortunately an evaluation of the online CBT did not happen; <a href="https://www.gov.uk/government/publications/helping-people-with-mental-health-problems-find-work">research was instead conducted</a> with service users to inform its development. We can have some confidence in this approach, given that promising evidence already exists for online CBT – particularly in terms of job retention. A <a href="http://onlinelibrary.wiley.com/doi/10.1002/14651858.CD006237.pub3/abstract">recent Cochrane review</a> (focusing on depression) found “moderate-quality evidence that enhancing primary or occupational care by providing workers with a structured telephone or online cognitive behavioural therapy reduces sickness absence compared to regular care”. </p>
<p>The second intervention, assessing the effectiveness of integrating employment support into NHS psychological therapy, was given a six-month pilot. This was run in four areas of England; and the service was offered to Employment and Support Allowance claimants with mental health conditions. <a href="https://www.gov.uk/government/publications/helping-people-with-mental-health-problems-find-work">An evaluation</a>, which we conducted at <a href="http://www.theworkfoundation.com/">The Work Foundation</a>, showed positive results – 15 service users found paid work and many others achieved a range of other positive outcomes. </p>
<p>However some caution is warranted when relating this pilot to the one proposed in the Budget. While the pilot was developed around integrating employment support into NHS psychological therapy services, this is in fact a significant step away from the Budget commitment to co-locate NHS psychological therapy services in the Jobcentre. </p>
<p>Our evaluation of the pilot suggests that integrating mental health support within the Jobcentre may present some issues.</p>
<h2>Supporting employment</h2>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/75676/original/image-20150323-17678-10qckgc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75676/original/image-20150323-17678-10qckgc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75676/original/image-20150323-17678-10qckgc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75676/original/image-20150323-17678-10qckgc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75676/original/image-20150323-17678-10qckgc.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75676/original/image-20150323-17678-10qckgc.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75676/original/image-20150323-17678-10qckgc.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">More effective to base support in health and community services?</span>
<span class="attribution"><a class="source" href="http://www.shutterstock.com/pic-133609640/stock-photo-young-woman-listening-to-man-s-testimony-at-a-support-group.html?src=BG_KwZNDOgUPPAEPnxuOGw-1-5">Support by Shutterstock</a></span>
</figcaption>
</figure>
<p>The Individual Placement and Support (IPS) model of supported employment, <a href="http://www.centreformentalhealth.org.uk/employment/ips.aspx">is based on eight principles</a>, including the integration of employment specialists within clinical teams. The approach is already used in various parts of the UK (commissioned locally in response to recognised need), and there is <a href="http://www.bmj.com/content/322/7280/204">substantial evidence</a> that it is effective in improving employment outcomes for people with severe and enduring mental health conditions (including schizophrenia).</p>
<p>The IPS model of employment support is usually delivered in the community, often by third-sector providers – using a very different setting from the pressurised environment of a Jobcentre. In our evaluation of the pilot, service users spoke specifically about the value of being able access employment support outside of the Jobcentre. </p>
<p>Concerns came from within the Jobcentre as well, with one adviser fearing that effectively putting a Jobcentre “stamp” on the provision of therapy, would have a negative effect on claimants perceptions of the service and its potential health benefits. </p>
<p>Such concerns are only heightened <a href="http://www.mind.org.uk/media/1690126/weve_got_work_to_do.pdf">by reports of poor treatment</a> by some Jobcentre staff of people with mental health conditions, as well as worrying media reports that have suggested that therapeutic support would be mandatory and that people’s <a href="http://www.telegraph.co.uk/news/politics/conservative/10964125/Tories-discuss-stripping-benefits-claimants-who-refuse-treatment-for-depression.html">welfare benefits would be dependent on uptake</a>.</p>
<p>The evaluation showed that integrating employment support and psychological therapy has positive outcomes. My concern is negative perceptions of the Jobcentre, and indeed the culture found within it, will form a barrier to effective treatment in a way that community and health service-based IPS services avoid. To me, the key is in the integration of health and employment services – and the awareness that this is about much more than co-location. It is about the shared values, and the shared objectives of IPS providers and the NHS. Unfortunately, even with the best intentions, these will be fundamentally different from those of the Jobcentre.</p>
<p>Having the government take the issue of mental illness and employment so seriously is nothing to be sniffed at, and I do not wish to appear negative – there are many people who will benefit from having faster access to evidence-based psychological therapy in a way that might help them to stay in or to find a job. Roll-out is not due to begin until the summer – lets hope the DWP uses this time wisely to address some of the barriers to providing helpful and effective support for people with mental health conditions who want to work.</p><img src="https://counter.theconversation.com/content/39145/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>The Work Foundation receives research funding from a number of government and commercial organisations. In all cases, it retains editorial control over its output.</span></em></p>Measures to co-locate employment support for mental health service users in Jobcentres may be less valuable than placing them elsewhere.Karen Steadman, Senior Researcher, Health and Employment, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/390962015-03-20T18:18:09Z2015-03-20T18:18:09ZWages and cuts undermine Osborne’s living standards boast<figure><img src="https://images.theconversation.com/files/75523/original/image-20150320-14636-w23y12.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Do you feel better off?</span> <span class="attribution"><span class="source">Household image via www.shutterstock.com</span></span></figcaption></figure><p>As part of his presentation on Wednesday of a decidedly pedestrian budget, George Osborne managed to grab headlines <a href="http://www.theguardian.com/news/datablog/2015/mar/18/budget-2015-challenge-living-standards">with the claim that his policies have brought a rise in living standards</a>. The chancellor presented “real household disposable income” as the most up-to-date and comprehensive measure of living standards and told listeners (and House of Commons dozers) that:</p>
<blockquote>
<p>On that measure I can confirm, on the latest OBR [Office for Budget Responsibility] data today, living standards will be higher in 2015 than in 2010. And it confirms they are set to grow strongly every year for the rest of the decade.</p>
</blockquote>
<p>There are two major shortcomings of his “most up-to-date and comprehensive measure”. First, it does not account for indirect taxes, in other words VAT, which is subtracted from disposable income to obtain “post-tax income”. It also fails to include any non-cash benefits, public or private. </p>
<h2>Delivering benefits</h2>
<p>For the average household in the fiscal year 2012-13, post-tax income was 19% less than disposable income. And for the average household, non-cash benefits raised post-tax income by about 25%, taking us overall to a level of 3.5% above disposable income, and to a figure the Office for National Statistics <a href="http://www.ons.gov.uk/ons/dcp171778_367431.pdf">describes as “final income”</a>. But those benefits, including health, education and social services, have since suffered substantial cuts from a chancellor delivering austerity medicine. </p>
<p>This effect flows from reductions in NHS funding resulting in <a href="http://www.theguardian.com/society/2011/oct/17/nhs-cuts-impact-on-patients-revealed">less or slower access to care</a>; the astronomical <a href="http://www.bbc.co.uk/news/education-11677862">increase in the private cost of higher education</a>; and the reduction in social workers across a range of services, <a href="http://www.communitycare.co.uk/2014/08/13/social-work-faces-knock-effect-youth-service-cut-backs/">most notably for young people</a>. The National Association of Welfare Rights Advisers has a <a href="http://www.nawra.org.uk/wordpress/wordpress/wp-content/uploads/2012/03/Benefit-changes-Parts-1-and-2-April-2013.pdf">quick-reference table</a> explaining most of the cash and non-cash benefit cuts.</p>
<p>So, the issue is not whether one income measure is larger or smaller than another, but whether the relevant one has gone up or down. It is likely that the really relevant number, final income, has indeed increased by less than disposable income because of those cuts in social services and the increase in VAT. In other words, <a href="https://theconversation.com/are-we-better-off-than-at-the-last-election-it-depends-whos-setting-the-standards-39020">the chancellor chose a measure to his liking</a>.</p>
<p>A defence that argues, “well, depends on how you measure it” does not wash. Household “living standards” by any reasonable definition should exclude all taxes (not just income taxes as for disposable income) and include non-cash benefits. There are better measures than “final income”, but it is indisputably superior to disposable income.</p>
<h2>Pay rewards</h2>
<p>But, let’s grant the chancellor his measure and take a look at it in the chart below, <a href="http://www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?cdid=IHXZ&dataset=ukea&table-id=A12">which shows percentage point differences</a> in real per capita disposable income compared to the second quarter of 2010 when he moved into 11 Downing Street. </p>
<p>The first thing to note is that disposable income collapsed during the first six quarters of the coalition government, briefly recovered in mid-2012, then collapsed a second time. Finally, it began to rise, almost returning to its level in the second quarter of 2010 at the end of 2014 (but not quite, still down by 0.3%).</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/75434/original/image-20150319-1600-1jov3vq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/75434/original/image-20150319-1600-1jov3vq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75434/original/image-20150319-1600-1jov3vq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=424&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75434/original/image-20150319-1600-1jov3vq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=424&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75434/original/image-20150319-1600-1jov3vq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=424&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75434/original/image-20150319-1600-1jov3vq.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=533&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75434/original/image-20150319-1600-1jov3vq.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=533&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75434/original/image-20150319-1600-1jov3vq.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=533&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">ONS</span></span>
</figcaption>
</figure>
<p>Thus, the chancellor’s legitimate claim is that he brought real per capital disposable income back to where it was when he took office – and he needed almost five years to do this. If the economy grows during 2015 at approximately the rate the chancellor announced in his budget speech, he can claim he achieved a 2% improvement in household income in five and a half years.</p>
<p>In 2010, if Osborne had offered UK voters an increase in real income of 2% in the waning moments of the coalition’s five years, few if any would have been impressed. This nothing-to-brag-about performance is easily explained. As of January this year, real weekly earnings in the private sector rested at a full 5% below their level in April 2010 (details in the ONS <a href="http://www.ons.gov.uk/ons/rel/elmr/economic-review/march-2015/art.html#tab-The-distribution-of-real-wage-growth">Economic Review March 2015</a>), a decline intimately linked to austerity policies (but that’s for another article).</p>
<p>Wages down, household income stagnant for five years. Any more good news for households, George?</p><img src="https://counter.theconversation.com/content/39096/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Weeks does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A defence that argues that ‘it depends on how you measure it’ does not wash.John Weeks, Professor Emeritus, SOAS, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/390612015-03-19T15:00:59Z2015-03-19T15:00:59ZOsborne’s business friendly budgets have been bailed out by borrowers<figure><img src="https://images.theconversation.com/files/75370/original/image-20150319-1567-6wz34.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">In the pink?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/hozinja/5976378132/in/photolist-s2jD4-c49wfq-dknSHR-dknUc5-dknUT7-dknT6B-dknTex-bifXta-nY9qgm-bsX95m-bFS2UM-aFhiZS-9vwQu4-bFS5uk-f1eLtG-5RMTPe-3emrhH-dRJjE1-tM64F-dywKpQ-a9YE61-kfxq5F-a77v1h-jmxEru-eTJwPj-i1y4Bq-auXLr3-oUjwqc-nVo14J-3TputB-4ytq6G-gaJ7eP-e8kmiT-p7D2fr-jQkj49-bkyogL-a6uGVV-oQ8XMx-dvUTpo-cEHL7Q-gqNYD1-gqNX6v-gXKowb-j939F-f7K6RV-nXjM47-nEX14Z-cEHQkC-qoVaBC-5UYHLZ">Eric Hossinger</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>We can now safely say that deficit elimination and public debt reduction were never central to George Osborne’s long-term economic plan. Take the casual way the chancellor pared down a planned budget surplus for 2019/20 [(from £23bn to £7bn)](http://www.bbc.co.uk/news/business-31942068](http://www.bbc.co.uk/news/business-31942068), having long ago ditched the once-essential balanced budget target for 2015/16 as proof. The real “long-term plan” was to let companies make more profit, even if it meant the public and household sectors going further into the red.</p>
<p>Back in 2010, delivering the City of London’s <a href="http://www.totalpolitics.com/print/speeches/35193/george-osborne-mais-lecture-a-new-economic-model.thtml">Mais Lecture</a>, the Chancellor of the Exchequer told his business-focused audience that:</p>
<blockquote>
<p>When our households, our banks and our government are so indebted, raising the real rate of return on investment is the only sustainable route to prosperity … By embarking upon a series of reforms that will raise the real return on investment, we can raise the rate of investment right now.</p>
</blockquote>
<p>Budgets since June 2010 have relentlessly stuck to that task. To raise business investors’ return, the main rate of corporation tax has been dropped <a href="https://www.gov.uk/corporation-tax-rates/rates">to 21% from 26% since 2011</a> and is soon to match the small-business rate of 20%. The wage subsidy introduced by the previous government’s employee tax credits has been supplemented by direct <a href="http://www.bbc.co.uk/news/business-18606178">subsidies for younger workers</a>, and other tax breaks for capital expenditure, now defined to include research and development.</p>
<p>These policies have undoubtedly helped to revive the return on private sector investment, according to the best available measure for what businesses get back for what they put in. Non-financial companies’ net rate of return on capital employed, excluding the volatile North Sea oil sector, <a href="http://www.ons.gov.uk/ons/dcp171778_390961.pdf">climbed back to 12% by 2014</a>, a level last attained in 1998. </p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/75382/original/image-20150319-1588-ezax0o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/75382/original/image-20150319-1588-ezax0o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75382/original/image-20150319-1588-ezax0o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=400&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75382/original/image-20150319-1588-ezax0o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=400&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75382/original/image-20150319-1588-ezax0o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=400&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75382/original/image-20150319-1588-ezax0o.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=503&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75382/original/image-20150319-1588-ezax0o.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=503&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75382/original/image-20150319-1588-ezax0o.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=503&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Building for growth.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/mikepaws/7015833839/in/photolist-95rdk9-afu4ci-aeCKc1-afNHv2-aeBT7W-7tYskj-afcU2e-aeYVZx-aftSJX-af9bSB-agiJRt-af4tCr-agnbFw-agpb2t-af7U2L-af79a3-agnagY-bFXYYp-afxK2C-af9s7E-af9oXa-af6HTL-aeAdXy-af9nDX-agmJ6W-afsR5D-aextNt-aeCiiu-agp7ch-aeAgUA-aeAeYo-af1jgK-agm5Wa-agmGSo-af3RQH-afwVWm-af7eHN-afNJze-afaPNU-afRxru-af4z9c-aeAaas-9AbjQm-aeZLsV-afxHZY-agmjGt-aeyYK2-af8CX6-aexqHr-af7Q7G">Michael Garnett</a>, <a class="license" href="http://creativecommons.org/licenses/by-nd/4.0/">CC BY-ND</a></span>
</figcaption>
</figure>
<p>Higher corporate profitability has, as promised, been followed by a rise in the UK’s rate of investment. This doesn’t show in the data for gross domestic fixed capital formation, which as a proportion of GDP <a href="http://data.worldbank.org/indicator/NE.GDI.FTOT.ZS">has levelled off at 16% since 2009</a>, after dropping from 18% in 2005-8. But that broad measure includes households’ property purchases, and the public sector programmes which the chancellor cut sharply in 2010. </p>
<p>More precisely defined private sector business investment has risen steadily, from 8.5% of GDP in 2010 to 9.9% across the first three quarters of 2014, according to <a href="http://www.ons.gov.uk/ons/publications/re-reference-tables.html?edition=tcm%3A77-355538">the latest GDP data</a>. So it’s mission accomplished, on the terms the chancellor set himself in early 2010.</p>
<h2>A high price for higher returns</h2>
<p>Achieving this goal has required a heavy sacrifice of the chancellor’s other start of term pledges, especially that of balancing the budget, now postponed four years to 2018/19. </p>
<p>Corporation tax receipts haven’t risen in the way that <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/356099/Corporation_Tax_Statistics_September_2014.pdf">proponents of the rate-cuts hoped</a>. And much of the substantial job creation since 2010 has been at rates of pay <a href="http://www.thisismoney.co.uk/money/news/article-2795899/treasury-sees-25billion-shortfall-income-tax-receipts-amid-low-wage-growth.html">too low to generate tax revenue</a>.</p>
<p>Building up demand for what businesses produce, when households don’t have much more to spend, as meant re-mixing another siren call from 2010. Osborne warned his Mais Lecture audience that “the overhang of private debt in our banking system and our households weighs heavy on future prosperity.”</p>
<p>Banks have since brought their debts down, with generous treasury and Bank of England help. But after a brief period of payback, UK household debt <a href="http://www.thisismoney.co.uk/money/news/article-2724894/Families-red-pose-threat-UK-recovery-household-debt-quadruples-1990.html">started rising again in 2011</a>, with any ongoing improvement for homeowners’ finances now dependent on rising house prices. Household consumption will contribute 1.6 percentage points to this year’s forecast 2.5% GDP growth, compared to just 0.5 points from business investment, with the same pattern continuing to 2020, according to the <a href="http://cdn.budgetresponsibility.independent.gov.uk/March2015EFO_18-03-webv1.pdf">Office for Budget Responsibility analysis</a> accompanying Wednesday’s budget. To achieve this, households’ gross debt to income ratio is forecast by 2019 to have risen to 170%. The eagle-eyed will notice that this exceeds its pre-crisis peak in 2008.</p>
<h2>Investment disconnect</h2>
<p>Confirming that it is consumption, not business investment, that has underpinned the return to growth, Bank of England Monetary Policy Committee member <a href="http://www.bankofengland.co.uk/publications/Documents/speeches/2014/speech703.pdf">Ian McCafferty noted a year ago</a> that:</p>
<blockquote>
<p>A broad-based recovery in activity – which must mean a recovery in household spending, which accounts for 60% of gross domestic product (GDP) – is a prerequisite for a recovery in business investment, not the other way round.</p>
</blockquote>
<p>The lagged response of investment may be one reason for <a href="http://mainlymacro.blogspot.co.uk/2014/03/see-no-evil.html">the failure to revive labour productivity since 2008</a>, which underlies the slow wage growth. But there’s an unsolved puzzle from the pre-crisis period that Osborne might have done well to study before pinpointing investment and its rate of return as the key to prosperity. The tranquil decade before 2008 was great for corporate profitability – and featured a trend decline in the investment rate, as the chart below shows.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/75349/original/image-20150319-1592-17jdbak.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/75349/original/image-20150319-1592-17jdbak.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75349/original/image-20150319-1592-17jdbak.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=404&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75349/original/image-20150319-1592-17jdbak.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=404&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75349/original/image-20150319-1592-17jdbak.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=404&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75349/original/image-20150319-1592-17jdbak.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=507&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75349/original/image-20150319-1592-17jdbak.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=507&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75349/original/image-20150319-1592-17jdbak.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=507&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption"></span>
<span class="attribution"><span class="source">Bank of England</span></span>
</figcaption>
</figure>
<p>The pre-crash economy grew without needing faster accumulation. And before 2000, UK corporates regularly posted world-leading profitability (<a href="http://www.google.co.uk/url?url=http://www.ons.gov.uk/ons/rel/elmr/economic-trends--discontinued-/no--565--december-2000/international-comparisons-of-company-profitability.pdf&rct=j&frm=1&q=&esrc=s&sa=U&ei=AN0KVefEEua07gbh6ICQDA&ved=0CDkQFjAJ&usg=AFQjCNEGX6AQGejM-ReneE-su0SSCcN_KQ">far above other EU countries’</a>) without this translating into stronger investment or growth. </p>
<p>Osborne’s budgets have undoubtedly made many businesses happy. But not enough to make them splash the private cash sufficiently for his unprecedented monetary and fiscal stimulus to be safely withdrawn.</p><img src="https://counter.theconversation.com/content/39061/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Alan Shipman does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>For five years the Chancellor has sought to invigorate returns on investment for businesses, but the pay off is yet to materialise.Alan Shipman, Lecturer in Economics, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/390312015-03-19T14:23:26Z2015-03-19T14:23:26ZHelp-to-Buy ISAs will end up feathering nests of the wealthy – here’s how<figure><img src="https://images.theconversation.com/files/75355/original/image-20150319-1572-1z0hxcy.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">Feeding the beast?</span> <span class="attribution"><a class="source" href="https://www.flickr.com/photos/digallagher/4880157508/in/photolist-8rf5NG-8RpBYb-5JTVeX-6DcQP2-8cqs9Q-6qm7Gh-4kNsB-96Ja9e-aYMUqk-dyhzLH-aPmLt-4yVHP-52WAqX-9kbkpY-7b4LP1-6G883i-8F83cb-GQytd-74ZGVm-8cqs8N-aDHEMV-qqk37f-eb4fN-5Yznk1-iQncn8-HbMUi-ioLNnZ-9ECD9b-9EzJzR-qfutr5-bk7FuR-h6zBJY-5ZfE8s-5LFa6J-bHad8i-4pFNC4-pTTcbp-e8vn4f-p3GFvy-7vqv6h-3MZqB-79DhKv-5Yiw7d-3wuW2D-3wuYkv-4qwcwr-7JFN2u-3Mwevx-6ux3F6-dnkHi">Diana Parkhouse</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span></figcaption></figure><p>George Osborne’s bid to boost home ownership in Britain might look like an effort to give young people a leg-up onto the housing ladder, but the evidence suggests they will be sorely disappointed. The <a href="https://theconversation.com/uk/topics/uk-budget-2015">Chancellor of the Exchequer’s budget</a> unveiled a new “Help-to-Buy ISA” savings account which will subsidise deposits for first-time buyers while leaving untouched the fundamental flaws at the heart of our growing housing crisis.</p>
<p>The <a href="http://www.independent.co.uk/money/mortgages/help-to-buy-isa-qa-are-they-real-help-for-firsttime-buyers-or-simply-a-votewinner-for-the-2020-election-10118723.html">new ISA savings accounts</a> will be available through banks and building societies from this autumn. In a nutshell, the government will add £50 to every £200 which savers manage to put away towards the deposit. First time buyers can make an initial deposit of up to £1,000 when opening the account. The total subsidy to first time buyers is capped at £3,000. It can be used by first time buyers to purchase homes priced up to £450,000 in London and £250,000 elsewhere. </p>
<p>The new policy is similar in spirit to the <a href="https://www.gov.uk/government/policies/helping-people-to-buy-a-home/supporting-pages/help-for-first-time-buyers">various predecessor Help-to-Buy schemes</a>. The Help-to-Buy policy has been described by commentators as the biggest government intervention in the housing market since the <a href="http://www.politics.co.uk/reference/right-to-buy">Right-to-Buy scheme of the 1980s</a>. But Help-to-Buy and, in particular, the new Help-to-Buy ISA are not a good idea. They are unlikely to help first time buyers achieve their dream of home ownership.</p>
<h2>Why it won’t work</h2>
<p>The new ISA is intended to stimulate housing demand from first time buyers. This should translate – in theory at least – into new housing being supplied and higher home ownership. </p>
<p>However, evidence from the US suggests that there is <a href="http://papers.ssrn.com/sol3/papers.cfm?abstract_id=2375853">only a very weak link at best</a> between housing subsidies and improved home ownership levels. In fact, in tightly regulated housing markets in the US (where there is inflexible supply), the subsidies have a negative effect on home ownership because the price effect – through increased demand – more than offsets the income effect from the subsidy. In less regulated US markets (with flexible supply), subsidies do have a positive effect on home-ownership rates, but only for higher income groups. </p>
<p>The trouble, from the UK perspective, is that <a href="http://www.ayrshire-jsu.gov.uk/download/review%20of%20housing%20supply%20-%20interim.pdf">long standing evidence</a> that I have <a href="http://www.spatialeconomics.ac.uk/textonly/SERC/publications/download/sercdp0119.pdf">recently considered in research</a> with <a href="http://www.cpb.nl/en/medewerkers/wouter-vermeulen">Wouter Vermeulen</a> suggests that the UK has an extraordinarily inflexible planning system. This makes housing supply incredibly unresponsive to demand shocks and acts to push up house prices. This effect is most pronounced for London and the South East, where planning regulations are tightest. In other words, stimulation of demand by a Help-to-Buy ISA has the likely effect of driving up house prices, especially in London and the South East, while having no positive effect on construction or ownership.</p>
<h2>A busted building boom</h2>
<p>Consistent with this idea, <a href="http://www.nationwide.co.uk/%7E/media/MainSite/documents/about/house-price-index/Q2_2014.pdf">according to Nationwide</a>, house prices in London increased by 25.8% in the year following the announcement and subsequent implementation of the original Help-to-Buy scheme, from the second quarter of 2013 to the same period in 2014.</p>
<p>A residential building boom failed to emerge. To the contrary, housing construction is currently at record lows. According to <a href="https://www.gov.uk/government/collections/house-building-statistics">statistics from the Department for Communities and Local Government</a>, the UK built close to 380,000 new homes in the fiscal year of 1969/70 (when statistics began). Housing construction gradually declined towards a record low in 2012-13 of less than 135,510 new homes. In 2013-14 figures were slightly higher at 140,930 new homes, but this reflects the typical increase associated with an economic recovery rather than a building boom induced by Help-to-Buy. The UK homeownership rate has been <a href="http://www.ons.gov.uk/ons/rel/census/2011-census-analysis/a-century-of-home-ownership-and-renting-in-england-and-wales/short-story-on-housing.html">in decline since the turn of the millennium</a>, falling from 69% in 2001 to 64% in 2014.</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/75362/original/image-20150319-1572-1shcmet.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/75362/original/image-20150319-1572-1shcmet.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75362/original/image-20150319-1572-1shcmet.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75362/original/image-20150319-1572-1shcmet.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75362/original/image-20150319-1572-1shcmet.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75362/original/image-20150319-1572-1shcmet.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75362/original/image-20150319-1572-1shcmet.jpg?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75362/original/image-20150319-1572-1shcmet.jpg?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">Brick by brick.</span>
<span class="attribution"><a class="source" href="https://www.flickr.com/photos/jvk/19081705/in/photolist-5nR65u-6b4bao-9h5jXj-mpcssV-8mYPf-zVWZ-oTSHg9-5VMSZy-h7UsJM-ahJSZo-vGnop-8Q2Saq-2FNjV-6crG7P-5nR7pQ-5c3rRw-5nMv9V-btKCWB-aoBXPC-25217m-44r4Hs-84EbAS-ccyvTQ-q9GQov-h2YiAk-9wCSYb-5ZeVJC-xd4E-jA9q5y-8hqH13-pmWTEX-9h5kES-4fsSbN-a73cX-CnPfH-hp2j2t-8ddhtK-6ydtd-fiH3k1-o5Uvwb-ffBh8q-nryTNc-nrhK6w-jAotCC-2HFGgH-aY3xE-bP3Q2n-5Z6Jv9-q9GQ1B-6p7QUx">John Keogh</a>, <a class="license" href="http://creativecommons.org/licenses/by-nc/4.0/">CC BY-NC</a></span>
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</figure>
<p>With all likelihood the Help-to-Buy ISA scheme will have similar – if perhaps weaker – stimulating effects on housing demand and prices. The positive effect on house prices may be particularly pronounced in London and the south east and for starter homes. However, it is important to note that since starter homes, “trade-up” homes and private rental homes are all reasonably close substitutes, house prices and private rents are likely to increase across the spectrum. </p>
<h2>No Spain, no gain</h2>
<p>In fact <a href="https://ideas.repec.org/p/ces/ceswps/_470.html">research by François Ortalo-Magné and Sven Rady</a> for both the UK and the US suggests that due to “trickle-up effects”, capital gains on starter homes incurred by credit-constrained owners can lead to a housing price overreaction, with prices of trade-up homes displaying the most volatility. As a consequence of all this, it is highly likely that first time buyers are no better off. In fact they may be worse off for two reasons. First, as tax payers they help finance the subsidies. Second, the increased prices of starter homes may mean that first time buyers can no longer reach the <a href="http://www.bankofengland.co.uk/pra/Documents/publications/ps/2014/ps914.pdf">loan-to-income ratios</a> recommended by the Bank of England and thus are priced out.</p>
<p>So who benefits from housing subsidies such as the Help-to-Buy ISA? Almost certainly it is not young first-time buyers, or even younger existing homeowners who will find trade-up homes for expanding families are further out of reach. Instead, because the subsidy likely increases house prices and private rents across the housing spectrum, the main winners may in fact be <a href="https://theconversation.com/rise-of-generation-rentier-with-buy-to-let-property-shaping-up-as-new-annuity-for-pensioners-25294">wealthy buy-to-let owners and older homeowners</a>, especially those thinking about downsizing or moving to countries where housing is comparably affordable. In short, the policy may in fact subsidise wealthy owners of multiple or expensive properties and retirees who sell-up for a move to Spain.</p>
<p>Any political party that is serious about solving the British housing crisis should address the rout-cause of the problem, which is the broken British planning system. The proposed Help-to-Buy ISA not only is likely ineffective in raising home ownership, it also likely has undesirable redistributive effects, and, perhaps worst of all, worsens the ongoing housing affordability crisis.</p><img src="https://counter.theconversation.com/content/39031/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Christian Hilber has received funding in the past from the National Housing and Planning Advice Unit to conduct research. He is one of the co-applicants of the Spatial Economics Research Centre, which has received funding from the Economic and Social Research Council.
</span></em></p>George Osborne’s bid to boost home ownership in Britain might look like an effort to give young people a leg-up onto the housing ladder, but the evidence suggests they will be sorely disappointed.Christian Hilber, Associate Professor of Economic Geography (Reader), Director of MSc in Real Estate Economics and Finance, London School of Economics and Political ScienceLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/390282015-03-19T06:30:46Z2015-03-19T06:30:46ZThe gaping productivity hole in Osborne’s election budget<p>One of the striking announcements in George Osborne’s last budget before the election is a significant reduction in the amount of budget surplus he is aiming for by the end of the next parliament. He is now only aiming for a £7 billion surplus in 2019-2020, instead of the whopping £23 billion he wanted in his Autumn Statement in December. </p>
<p>As the Office for Budget Responsibility <a href="http://cdn.budgetresponsibility.independent.gov.uk/March2015EFO_18-03-webv1.pdf">said today</a>, public service spending is in for a rollercoaster, as displayed by the following graph:</p>
<figure class="align-center zoomable">
<a href="https://images.theconversation.com/files/75268/original/image-20150318-2473-g00szt.png?ixlib=rb-1.1.0&q=45&auto=format&w=1000&fit=clip"><img alt="" src="https://images.theconversation.com/files/75268/original/image-20150318-2473-g00szt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75268/original/image-20150318-2473-g00szt.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=321&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75268/original/image-20150318-2473-g00szt.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=321&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75268/original/image-20150318-2473-g00szt.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=321&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75268/original/image-20150318-2473-g00szt.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=403&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75268/original/image-20150318-2473-g00szt.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=403&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75268/original/image-20150318-2473-g00szt.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=403&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px"></a>
<figcaption>
<span class="caption">The Roller Coaster ride for public service spending shown by year on year growth in real resource DEL spending.</span>
<span class="attribution"><a class="source" href="http://cdn.budgetresponsibility.independent.gov.uk/March2015EFO_18-03-webv1.pdf">Office for Budget Responsibility</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
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<p>The strange spending path is due to politics. The implication of the Autumn Statement was that public service spending would be cut to levels not seen since 1948. Now they will be 36% of GDP – marginally above 1999-2000 (when it was 35.9%).</p>
<h2>The productivity problem</h2>
<p>What the chancellor didn’t mention is that UK GDP per person is 16% lower than we would have expected on <a href="http://cep.lse.ac.uk/pubs/download/ea020.pdf">pre-crisis trends</a> and the major factor is <a href="http://cep.lse.ac.uk/pubs/download/ea021.pdf">lousy productivity growth</a>. Productivity is important because, while the chancellor can point to healthy GDP growth numbers and high employment figures, productivity (GDP per hour) is critical for long-run income growth. </p>
<p>The chancellor neither mentioned the productivity problem, nor did anything to address it. Indeed, several of his policies will make it worse. For example, £2.2 billion has been pencilled in for a continuation of the awful Help to Buy Scheme which subsidises house demand for first-time buyers. But without a serious way of delivering an increase in housing supply this will simply lead to further escalation in house prices. </p>
<p>Further, the Conservative fiscal plan is to deliver a balance on the total budget by 2018-2019, whereas the other main parties are focused on balancing the current budget (which excludes public investment). This matters, because the Conservative fiscal rules leave little room for the government to borrow for investment. </p>
<p>Low rates of investment, especially in infrastructure and research and development, have been an <a href="http://www2.lse.ac.uk/researchAndExpertise/units/growthCommission/documents/pdf/LSEGC-Report.pdf">important cause of low productivity</a>. The cuts in public investment of 40% over the first two years of this parliament were a huge policy error and contributed to the slowest recovery in a century. </p>
<h2>Austerity and cuts to come</h2>
<p>The Chancellor announced some tax takeaways (such as an extra £4.4 billion from the bank levy) and giveaways (like £5.7 billion in extra personal allowances) and we can expect more of the latter in the election campaign. But what the public is still unprepared for is the scale of austerity to come. </p>
<p>All the main parties have signed up to the Charter for Budget Responsibility which means balancing the cyclically adjusted current budget and cutting the deficit by 2017-2018. It is hard to see how this will be done without further tax rises, especially given the proposed cuts in unprotected public services. Tax rises have occurred after each of the last five elections, so don’t be surprised for a few unexpected tax shocks after polling day.</p><img src="https://counter.theconversation.com/content/39028/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Van Reenen does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>What the chancellor didn’t mention is that UK GDP per person is 16% lower than we would have expected on pre-crisis trends and the major factor is lousy productivity growth.John Van Reenen, Director, Centre for Economic Performance, London School of Economics and Political ScienceLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/390052015-03-19T06:30:43Z2015-03-19T06:30:43ZBudget sweeteners won’t win voters back for the Tories now<p>George Osborne’s <a href="https://www.gov.uk/government/speeches/chancellor-george-osbornes-budget-2015-speech">final budget statement</a> for the coalition was his most confident performance to date. If not actually triumphant, it certainly bordered on cocky.</p>
<p>The stony faces populating the Labour front bench told their own story – particularly when the chancellor delivered several well-aimed jokes in the direction of Ed <a href="http://www.huffingtonpost.co.uk/2015/03/18/budget-2015-george-osborne-ed-balls-_n_6893390.html">“Two Kitchens”</a> Miliband, and Harriet “Pink Van” Harman. </p>
<p>Osborne <a href="https://www.gov.uk/government/topical-events/budget-2015">mercilessly ridiculed</a> the prospects of a future coalition between Labour and the SNP by referencing the 600th anniversary of the battle of Agincourt “when a strong leader defeated an ill-judged alliance between the champion of a united Europe and a renegade force of Scottish nationalists.” </p>
<p>The massed ranks of Conservative MPs on the government benches roared. It was a clever performance, and Osborne’s most overtly partisan budget speech to date.</p>
<h2>Something’s missing</h2>
<p>In this budget, Osborne’s omissions were as significant as his inclusions. He had little to say about the NHS even though this is consistently one of the top three issues affecting voting intentions.</p>
<p>Nor did the chancellor mention his own <a href="http://www.ons.gov.uk/ons/rel/uktrade/uk-trade/december-2014/stb-uk-trade--december-2014.html">failure</a> to build the new economic model he had promised in 2010 to re-balance the national economy away from debt and consumption-led growth and towards trade and export.</p>
<p>While he mentioned that the budget deficit has been halved as a percentage of national income and would fall to 71.6% of GDP in 2019-20, Osborne also overlooked the fact he had promised to eradicate the structural current <a href="http://webarchive.nationalarchives.gov.uk/20130129110402/http:/www.hm-treasury.gov.uk/d/junebudget_complete.pdf">budget deficit by 2015-16</a>.</p>
<p>Furthermore, buried away in the figures produced by the <a href="http://cdn.budgetresponsibility.independent.gov.uk/March2015EFO_18-03-webv1.pdf">Office for Budget Responsibility</a> to accompany the budget was the revelation that household debt is set to increase from £1.728 billion or 145% of household income by the end of June 2015 to £2.495 billion or 172% of household income at the end of March 2020. </p>
<p>While this is less than previously forecast, it still means that economic growth in the next parliament will be driven by an increase in household debt. </p>
<p>Will an electorate already loaded up with near record levels of personal household debt really be prepared to vote for more of the same? After all, the <a href="http://books.google.co.uk/books/about/The_State_of_England.html?id=Ai07YgEACAAJ&redir_esc=y">political story of the past 45 years</a>, under prime ministers from Edward Heath to David Cameron, has been a succession of British governments which have promised long-term economic modernisation but delivered a series of short-term booms based on debt, interrupted by painful busts.</p>
<p>Osborne had to look to the future in his last budget rather than dwelling too much on his own performance as chancellor because, in truth, he has conformed to this tradition rather than broken away from it.</p>
<h2>Vote winner?</h2>
<p>The Conservative Party has not secured 40% in a national opinion poll <a href="http://ukpollingreport.co.uk/voting-intention-2">since March 2012</a>. For the past three years, the party has struggled even to match the 36% share of the vote it secured at the May 2010 general election. Opinion polls have reflected <a href="http://www.ifs.org.uk/uploads/publications/bns/BN165.pdf">stagnating or falling living standards</a> under the coalition.</p>
<p>In electoral terms, the potentially game-changing “feel good” factor has yet to materialise. That’s because salaries have stagnated <a href="http://www.ifs.org.uk/publications/7642">under the coalition</a> and have only begun to recover in the past few months. </p>
<p>At the 2010 general election, the Conservative Party won 83 of the 200 most marginal seats and finished second in 79 of them. Osborne’s pledge of a tax cut for 27m people by raising the personal tax-free allowance to £10,800 in 2016 and £11,000 in 2017 may be too little, too late to brighten to mood. This, and many other promises made in this budget felt a lot like promises of jam tomorrow, or rather after May 7. </p>
<p>But as the Office for Budget Responsibility has warned, Osborne’s plans for balancing the books after the election implies a need for the tightest squeeze on spending for five years in 2016 before spending increases kick in from 2019.</p>
<p>Rather than a transition to prosperity, what is on offer is actually further and deeper fiscal austerity. The severity of these squeezes could undermine economic recovery, just as it did during the coalition’s second and third years in office, forcing Osborne to abandon his Plan A policy of <a href="http://www.palgrave.com/page/detail/the-conservativeliberal-coalition-matt-beech/?K=9781137461360">expansionary fiscal contraction in 2014-15 and 2015-16</a></p>
<p>Lest Osborne should forget, in May 1997, the <a href="http://www.conservative-party.net/manifestos/1997/1997-conservative-manifesto.shtml">Conservative Party manifesto</a> championed the same themes. Sustained falls in inflation and unemployment, rising living standards, superior economic performance to the rest of Europe, reduced public borrowing, a commitment to cut inheritance tax all featured in the run up to that vote. The electorate duly rewarded the Major government for four and a half years of unbroken economic growth with a 179 seat landslide majority for Tony Blair and New Labour.</p><img src="https://counter.theconversation.com/content/39005/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Simon Lee does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Osborne’s confidence in the Commons won’t mean much to hard up workers.Simon Lee, Senior Lecturer in Politics, University of HullLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/390202015-03-19T06:30:34Z2015-03-19T06:30:34ZAre we better off than at the last election? It depends who’s setting the standards<p>In his budget, <a href="https://www.gov.uk/government/speeches/chancellor-george-osbornes-budget-2015-speech">George Osborne stated</a> that the average household is now enjoying higher living standards than in 2010. Labour <a href="http://press.labour.org.uk/post/107719711054/labour-calls-for-new-measure-on-living-standards">disputes this</a>, saying that this is the first election since the 1920s when living standards are lower than the previous one. These statements sound like polar opposites, but in fact, there is not a lot between them. </p>
<p>There are lots of ways of measuring household incomes. You can look at the average of what people earn or what they have as disposable income; you can look at means or medians; you can include all sources of income or just wage income. Naturally, each party chooses the measure that best suits them.</p>
<h2>Pick a number…</h2>
<p>Government figures tend to emphasise GDP per capita, which has risen very slightly <a href="http://cdn.budgetresponsibility.independent.gov.uk/March2015EFO_18-03-webv1.pdf">according to the Office for Budget Responsibility</a>. So has household income per head, if you include certain items such as imputed rent – the value of owning a home in which you live and can thus use free of charge, which is a kind of return on investment. </p>
<p>The <a href="http://www.resolutionfoundation.org/">Resolution Foundation</a> – a think-tank which has done a lot of analysis of living standards – uses a slightly narrower measure that corresponds more with what people think of as their income. <a href="http://www.resolutionfoundation.org/media/press-releases/household-incomes-will-start-rising-in-2015-but-painfully-slow-recovery-means-many-years-before-losses-are-restored/">It has found</a> that mean income has fallen by about 3%. The median has done better, but has still not quite regained its 2010 value. </p>
<p>Labour prefers to concentrate on average real (post-inflation) pay, which has <a href="http://www.ons.gov.uk/ons/rel/elmr/an-examination-of-falling-real-wages/2010-to-2013/art-an-examination-of-falling-real-wages.html">fallen 8%</a> since 2010. After years of pay freezes, or increases that fell behind inflation, it is <a href="http://www.bbc.co.uk/news/uk-politics-25869001">only in the past year</a> or so that people have started to get real-terms pay rises, so there remains a lot of ground to make up. There are all sorts of ways of looking at pay and earnings, including average weekly earnings, average hourly pay and what has happened to the pay of those who remain in the same job. Each produces a slightly different result.</p>
<h2>Reality check</h2>
<p>But these technical differences in measuring what has happened to real incomes should not obscure two underlying realities. The first is that, despite a recent upturn, the story of the past five years has indeed been unprecedented in the post-war period. Usually, income dips in a recession are short-lived, so real incomes rise significantly over any given five-year stretch. </p>
<p>The fact that we are arguing over whether we are slightly better off or slightly worse off than in 2010 shows that the normal promise of growth has not been fulfilled during this period. And there is enough variation around any average that, in a period during which there has been no significant household income growth overall, there will be plenty of people who have gone backwards.</p>
<p>The second is that many of the people who have gone backwards were badly off to start with. All the evidence is showing that fiscal austerity has hit the poorest the hardest. This is not surprising, since they depend the most on help from government. One indicator of this is how many people live in households with incomes below the minimum needed to reach a reasonable standard of living. <a href="http://www.minimumincomestandard.org">My team’s research</a> measures this standard after detailed consultation with the public over what that minimum should entail.</p>
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<figcaption><span class="caption">A quick explainer on living standards by the Resolution Foundation.</span></figcaption>
</figure>
<p>We have identified <a href="http://www.jrf.org.uk/sites/files/jrf/Households-below-MIS-Full.pdf">sharp and continuous increases</a> in the number of households below that threshold between 2008/09 and 2012/13. Families with children have been hit the hardest: the numbers below the minimum standard in such households rose over that period from 31% to 39%. This does not pick up what has happened in the past two years, but there is no sign that for most of these families things have got any better.</p>
<p>I make this claim with confidence – even now that real earnings are starting to rise – because low income families with children face a particular claw-back of any improvement in their earned incomes. According to our research, their dependence on tax credits means that for each extra pound that they earn, they can lose 73p (and 76p under the new Universal Credit). This comes about because they pay more tax, while support is reduced with rising income. </p>
<p>This would matter less if the amount you could earn before claw-back kicks in rose in proportion with prices and earnings. But this level of “disregarded” earnings has been frozen. The consequence is that if you have a low income and children, you may have to wait a whole lot longer before you really feel that your living standard is rising – or even that it has stopped falling.</p><img src="https://counter.theconversation.com/content/39020/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Donald Hirsch is a member of the Labour Party and an Associate Fellow at the Resolution Foundation. </span></em></p>Labour says we’re worse off, but the Tories say living standards are on the rise - who’s right?Donald Hirsch, Director of Centre for Research in Social Policy , Loughborough UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/390092015-03-19T06:29:12Z2015-03-19T06:29:12ZA sense of triumph, but Osborne may have set a trap for himself in his last budget<p>The introduction of five-year, fixed-term parliaments after the 2010 general election caused considerable unease about the British political system. The run-up to this year’s budget shows that these misgivings were well founded.</p>
<p>The change opened the possibility for budgets to be delivered at a key moment in an electoral schedule established by law. Whatever the merits of the measures announced by George Osborne in his latest budget, this is dangerous both for economic and political reasons. </p>
<p>Instead of focusing on the nation’s long-term needs, chancellors will face an irresistible temptation to prioritise short-term popularity if they present their budget just weeks before an election.</p>
<p>This, it could be argued, is what usually happens anyway. But in the past few decades there have been some <a href="http://www.bbc.co.uk/news/uk-politics-31803593">honourable exceptions</a>. The timetable now imposed by fixed term parliaments reduces the likelihood of such outbursts of integrity almost to vanishing point.</p>
<p>This year, despite what seemed to be extremely unhelpful circumstances, Ed Miliband sounded robust in his response. This will have pleased his backbenchers. It remains to be seen, though, how the exchanges will play to the voting public.</p>
<h2>Switch and bait</h2>
<p>True to his reputation for political calculation, Osborne has used his media allies very cleverly in the past few days. Headlines predicted a <a href="http://www.theguardian.com/society/2015/mar/18/budget-2015-tax-giveaways-will-not-help-low-paid-workers">giveaway budget</a>, which made it look as though he was hoping to buy the election with barefaced bribes.</p>
<p>His speech, though, suggested that a recent improvement in the nation’s finances would not be exploited so brazenly. Taxes will be cut, on savings as well as earned incomes, but the lion’s share of the proceeds would be devoted to paying down the national debt.</p>
<p>To the political anorak this looks like the work of a master tactician, promising to win Osborne credit for being responsible as well as generous. However, it might be that this budget proves to have been too clever by half.</p>
<p>If Osborne was right to claim that his austerity strategy has been working and should not be abandoned, critics could wonder how he could justify a giveaway on any scale, however modest.</p>
<p>What’s more, the ecstatic tone of the speech could give rise to expectations of a swift end to austerity. That could cause serious political problems down the line if the Conservatives manage to win the election.</p>
<h2>Risky strategy</h2>
<p>Osborne’s unexpected room for manoeuvre seems to derive, above all, from the current low level of inflation, owing largely to falling food and petrol prices. But these developments, particularly the latter, only underline the extreme volatility of global markets. Again, despite Osborne’s cloak of responsibility, it does seem that he is taking a gamble for short-term reasons, on the basis of factors which could easily prove to be temporary.</p>
<p>And even if the markets plat in his favour, it remains the case that the coalition’s overall strategy has not worked – Osborne has not eradicated the deficit in one parliament, as the government promised it would.</p>
<p>In practice, ironically, this chancellor has come closer to Labour’s 2010 promise for a longer term strategy of deficit-reduction. This does not mean, of course, that the government deserves no credit for the improving economic outlook but it does mean that the Conservatives still have to think twice before boasting about the coalition’s record.</p>
<p>The former chancellor Kenneth Clarke – who has good reason to know about such matters – has recently said that budgets <a href="http://www.telegraph.co.uk/finance/budget/11471752/Budget-2015-the-truth-about-the-Coalitions-economic-record.html">do not win general elections</a>.</p>
<p>Osborne’s latest attempt is unlikely to prove an exception to Clarke’s rule. However, this is not to say that chancellors will ever stop trying to produce election-winning budgets, especially in the era of fixed-term parliaments.</p><img src="https://counter.theconversation.com/content/39009/count.gif" alt="The Conversation" width="1" height="1" />
It might be that this budget proves to have been too clever by half.Mark Garnett, Senior Lecturer in Politics, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/390162015-03-18T16:55:42Z2015-03-18T16:55:42ZBudget 2015: no magic but plenty of political tricks<p>As expected, chancellor George Osborne pulled a handful of small rabbits out of his hat as he announced his pre-electoral budget. Lowering the tax allowance, cutting taxes to middle-income earners together with a few give-aways to pensioners, savers, prospective home-buyers, beer drinkers and van drivers are the typical electoral bribes that chancellors of all colours reserve for election years.</p>
<p>It remains to be seen whether this electioneering budget will have an effect on the Conservatives’ position in the opinion polls. It might not win any new supporters but in truth that doesn’t really matter. Osborne’s achievements as a very political chancellor go far beyond winning a few recalcitrant floating voters. If his record as a manager of the national economy is far from stellar, he succeeded in setting the public debate on the deficit and, as a result, he made the political weather.</p>
<p>This is a remarkable feat considering that Osborne’s economic strategy has failed. In 2010 he announced that the main priority of the coalition was to eliminate the public deficit by 2015 and that this would be achieved through a draconian programme of public spending cuts. But that has <a href="https://theconversation.com/the-graph-george-osborne-doesnt-want-you-to-see-38925">come to nothing</a>.</p>
<p>By Osborne’s own admission, the government failed to eliminate the public deficit and admitted that it won’t be eliminated before 2018. As a result of Osborne’s spending cuts, the economy <a href="https://theconversation.com/unprecedented-austerity-past-and-present-is-set-to-continue-whoever-gets-elected-in-may-38665">actually shrunk</a> in the first three years of the coalition government.</p>
<p>Showing some ideological flexibility, Osborne changed gear in 2013. He mixed cuts (in particular to welfare spending) with a stimulus plan. As a result of these changes and of falling oil prices, the British economy is expected to grow 2.5% this year according to the <a href="http://citywire.co.uk/money/budget-2015-obr-ups-growth-forecast-to-2-5/a804384">Office for Budget Responsibility</a>. That said, the squeezes on living standards persist, as do the endemic problems associated with low productivity and an over-reliance on the financial services industry.</p>
<h2>Electoral masterstroke</h2>
<p>But Osborne has turned a failed economic policy into a political success. While falling short of the deficit targets he set for himself, he managed to set the political debate on the public deficit by forcing Labour to succumb to his austerity narrative.</p>
<p>In this he was assisted by the City of London and by the London-based media who agreed (despite evidence to the contrary) that the only credible policy to eliminate the public deficit was a draconian programme of public spending cuts.</p>
<p>The political consensus on the deficit created huge problems for the opposition. Both Ed Miliband and Ed Balls tried to articulate a Keynesian alternative to the coalition’s austerity. But by 2013 they reluctantly accepted that the party’s economic credibility depended on the acceptance of spending cuts.</p>
<p>Thus, Labour accepted Osborne’s public spending plans and promised to produce a budgetary surplus by the end of next parliament. Balls has even ruled out making electoral proposals for extra capital spending <a href="http://www.newstatesman.com/politics/2014/09/balls-binds-labour-austerity-promise-no-extra-borrowing">paid for by public borrowing</a>.</p>
<p>As several opinion polls suggest, Labour is paying a heavy electoral price for its endorsement of austerity. The party is haemorrhaging votes to anti-austerity parties like the Greens and, more dangerously, to the SNP in Scotland. Analysis has showed that Labour could <a href="http://www.theguardian.com/politics/2015/jan/24/green-party-labour-threat-2015-election-robert-ford">lose 22 seats</a> in England as a result of the Green surge and close to <a href="http://may2015.com/featured/election-2015-your-complete-guide-to-predictions-about-scotland-and-the-snp/">50 seats</a> in Scotland to the SNP.</p>
<p>After forcing Labour to endorse austerity, Osborne used his last budget speech of this parliament to suggest that he is not even that bothered about the deficit. Indeed, he indicated he is ready to relax austerity and to steal some of Labour’s proposals (including on the minimum wage, living standards, regional development, tax avoidance and on the bank levy). This has enabled him to neutralise Labour’s stance that the Conservatives are set to shrink the size of the state to <a href="http://www.huffingtonpost.co.uk/2014/12/12/george-osborne-cuts_n_6308198.html">1930s levels</a>.</p>
<p>This leaves Labour on the defensive again (though Miliband’s reply to the budget showed him in a fighting mood). All of a sudden, Labour’s proposals on the minimum wage, regional development and public sector reform look modest and minimalist.</p>
<p>Considering that the Conservatives are seen by voters as the <a href="http://www.conservativehome.com/platform/2015/03/lord-ashcroft-the-conservative-lead-narrows-in-this-weeks-ashcroft-national-poll.html">most effective managers of the economy</a>, Osborne’s last throw of the dice may be just enough to see them win the most seats on May 7.</p><img src="https://counter.theconversation.com/content/39016/count.gif" alt="The Conversation" width="1" height="1" />
As expected, chancellor George Osborne pulled a handful of small rabbits out of his hat as he announced his pre-electoral budget. Lowering the tax allowance, cutting taxes to middle-income earners together…Eunice Goes, Associate Professor of Politics, Richmond American International UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/389972015-03-18T14:38:27Z2015-03-18T14:38:27ZBudget 2015: experts respond<p><em>Chancellor George Osborne has unveiled his fifth budget. Fifty days before the general election, it was a more optimistic set of announcements than the UK public has become used to, and Osborne made strong claims about the economic recovery, claiming a Tory government would take Britain “from austerity to prosperity”.</em></p>
<p><em>Here our panelists give their take on what this budget means for the economy, business, healthcare, education and the environment.</em></p>
<h2>Economy</h2>
<p><strong>Tony Yates, Reader in Economics, University of Bristol</strong></p>
<p>This budget is another reminder of how politics messes up tax and spending policy. We get small ripples of political business cycles in spending: pre-election giveaways and a resulting mini-boom, followed by post election draw-backs and a mini-bust. </p>
<p>And we have the spectacle of micro-tax shuffling – the constant moving money around from one pocket to another to create the illusion of doing something, when the real need is for stability and predictability. </p>
<p>The specifics of this budget are interesting. The new benefits for those saving up to be a first-time buyer are perhaps the most dramatic example of politics trumping economics. This is calculated to make young “hard working families” feel good, but in fact it will just drive up the price of the too-small housing stock and give a wealth transfer to the old who are selling properties to them. </p>
<p>The reforms to pensions will have their supporters. I am against them, on the grounds that state-supported and compelled annuities are there to provide a way to lean against our natural tendency to under-save for our old-age and under-insure against the risk of a long old-age in poor health. And it does so in a way that is equitable, efficient and cheap (since it avoids moral hazard) and shares risk across generations.</p>
<p>Bank taxes will also, no doubt, play well. But it indicates a policy of funding spending where politics make it easiest to grab money, and not on efficiency grounds. Bank taxes should be fair and based on the residual “too big to fail” risk. Punitive and variable taxes will simply impair bank balance sheets, constrain lending and complicate exit from the crisis.</p>
<p><strong>David Spencer, Professor of Economics and Political Economy, University of Leeds</strong></p>
<p>George Osborne, predictably, used his budget speech to hail the good news regarding the labour market in the UK. Employment, he told us, is at a <a href="http://m.bbc.co.uk/news/uk-politics-31929772">record level</a>, with more Britons in work than ever before. Even real wages are beginning to recover, after several years of decline. Osborne wants us to feel good about the recovery and he wants us to associate this recovery with his own stewardship of the economy.</p>
<p>Yet, closer scrutiny of the employment figures reveals a less optimistic picture of higher (no doubt enforced) levels of self-employment, lagging productivity growth, and despite recent signs of recovery, below-crisis standards of living. Employment has expanded but most of the jobs created are in low paid and low productivity sectors. So-called zero-hours contracts have also risen.</p>
<p>The securing of higher employment, in short, has imposed real costs on many. And with productivity set to remain low, the prospects for a rise in living standards look bleak indeed.</p>
<p>This budget is more about winning an election than securing the foundations for sustainable economic prosperity. It represents a huge missed opportunity.</p>
<h2>Business</h2>
<p><strong>Stephen Roper, Director, Enterprise Research Centre,
Warwick Business School</strong></p>
<p>The budget speech comes amid strong economic signals for the UK. Strengthening growth and falling unemployment contrast with an uncertain international backdrop, however. Attempts to reduce the budget deficit will also continue to put pressure on public sector budgets throughout the next parliament. For small firms the budget contained a range of targeted support measures. There was good news for those involved in the creative industries, horse racing, local newspapers all of which stand to get greater public support in future. </p>
<p>Changes to the tax treatment of angel investments and venture capital will make investment in high growth firms more attractive. More eye-catching however are the plans for Digital Tax Accounts which should simplify the tax affairs of many self-employed and small business owners. </p>
<p>More generally, many small firms will welcome the review of business rates announced by the government in mid-March. Any changes in business rates will, of course, be slow to emerge but will hopefully help smaller firms which are growing and creating jobs. Exporters may also benefit from the doubling of export support available through UK Trade & Investment announced in the budget, with targeted support for those firms seeking entry to the Chinese market. Farmers will also welcome the ability to average incomes over five years for tax purposes, something long campaigned for by the National Farmers’ Union.</p>
<h2>Tax</h2>
<p><strong>Prem Sikka, Professor of Accounting, Essex Business School at University of Essex</strong></p>
<p>The budget offers little to the average person.</p>
<p>The background: <a href="http://www.itv.com/news/2015-03-17/despite-an-increase-in-the-minimum-wage-5-3-million-people-are-paid-less-than-the-living-wage/">5.3 million people</a> receive less than the <a href="http://www.bbc.co.uk/news/business-20204594">living wage</a> and <a href="http://www.theguardian.com/uk-news/2015/feb/25/zero-hours-contract-rise-staff-figures">700,000 people are on zero hours contracts</a>. The <a href="https://www.gov.uk/state-pension/overview">UK state pension</a>, at less than 30% of the average income, is almost the lowest in western industrialised nations.</p>
<p>Meanwhile, wealth has been sucked upwards. The wealth of the richest 1% of the population is about the <a href="http://www.theguardian.com/uk-news/2014/may/15/britains-richest-1-percent-own-same-as-bottom-55-population">same as that held by the poorest 55%</a>. The top 10% of households hold 44% of wealth and the poorest 50% can barely muster 9% of total wealth. The poorest 10% of the households <a href="http://www.itv.com/news/update/2014-12-22/poor-households-pay-47-of-income-in-tax/">pay 47% of income in direct/indirect taxes</a>, compared to 35% for the richest 10%.</p>
<p>What has the government announced? An increase in personal allowance from £10,600 in 2014-5 to £10,800 in 2015-6; higher rate taxpayers to receive an inflation-busting rise in the threshold at which the higher marginal rate begins, and 20 pence an hour increase in the minimum wage will not change any the above. Tax exemption for the first £1,000 interest on savings will not help those who are struggling to make ends meet. Austerity cuts are to continue. The government claims that it will <a href="http://uk.businessinsider.com/budget-2015-george-osborne-and-tax-avoidance-2015-3">raise £3.1 billion</a> from clampdown on tax avoidance, but HMRC admits to <a href="https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/364009/4382_Measuring_Tax_Gaps_2014_IW_v4B_accessible_20141014.pdf">£34 billion of tax revenues going astray</a>.</p>
<p>Overall, the government continues with its strategy of cuts and low investment in social infrastructure. </p>
<p><strong>Jonquil Lowe, Lecturer in Personal Finance, Open University</strong></p>
<p>As pre-announced, five million people who have already bought annuities will from April 2016 be able to sell these to a willing buyer. The cash raised will be taxed at their normal tax rates (instead of the current 55% tax that would apply). The government will consult on the guidance and advice they need. The difficulty will be in <a href="https://theconversation.com/osbornes-reforms-may-not-give-pensioners-the-freedom-they-seek-38861">establishing a fair price for the annuity</a>. Sellers will also need to be aware of a large tax bill on big cash sums and the impact such a sale might have on benefits.</p>
<p>We all build up entitlement to our eventual state pension by paying national insurance contributions while working or being credited as if we had paid them. The new flat-rate state pension from April 2016 will be a good deal for the self-employed who’ll see their state pension entitlement increase to the same level as employees get, despite currently paying lower national insurance contributions. </p>
<p>It may seem a surprise then that the chancellor has announced the abolition in the next parliament of Class 2 National Insurance paid by the self-employed. However, the budget small print says that this will go alongside a review of Class 4 National Insurance that the self-employed pay as a percentage of their profits. It seems likely that this reform will result in a rise in Class 4 contributions – so the benefits might not be as significant as they sound.</p>
<p><strong>Karen Rowlingson, Professor of Social Policy, University of Birmingham</strong></p>
<p>George Osborne announced a rise in the personal tax free allowance to £11,000 a year from 2017. This increase might be seen as a way of tackling the squeeze on living standards and the growth of in-work poverty that has occurred over recent years. But, at a cost of nearly £2.7 billion, is this the best way to help people on low incomes?</p>
<p>Clearly those who have already been taken out of income tax altogether by previous reforms will see no further gain from raising the threshold still higher. If the aim of the policy is to increase the incomes of these people then it will achieve nothing. </p>
<p>Furthermore, tax policy needs to be considered alongside wages, tax credits/benefits, and the cost of living. Together these factors determine a family’s standard of living. In the past five or more years, wages have stagnated, tax credits have been cut and living costs increased (albeit inflation has recently come down significantly). </p>
<p>Increases to the tax threshold may help people to some extent but if their tax credits are cut many in the middle of the income distribution will benefit less than those who are better off. And the arrival of Universal Credit will further complicate the picture and blunt the benefit of tax cuts. </p>
<p>Income tax cuts clearly have an important role in relation to supporting people on low incomes but interactions with the benefit/tax credit system also need to be considered before making assumptions about how much people will benefit. And these tax cuts do nothing for the poorest whose income is already so low that they do not pay income tax currently. </p>
<h2>Welfare</h2>
<p><strong>Kate Pickett, Professor of Epidemiology, University of York</strong></p>
<p>George Osborne’s 2015 budget is old-fashioned, with his emphasis on economic growth, continued austerity, and his faith in trickle-down economics. All over the world, since the financial crisis, researchers and policy experts have been thinking about how we can re-shape our societies and economies to promote the well-being of the many over the wealth of the few. </p>
<p>The impact of inequality on societal and individual well-being should be at the forefront of every politician’s mind and at the heart of policy making. The UK has unacceptably high levels of mental and physical health problems and exceptionally low levels of social mobility and trust in others, <a href="https://theconversation.com/the-1-are-bad-for-your-health-its-time-to-tax-them-more-36526">all associated with high inequality</a>. And the recent economic upturn isn’t reaching young people and minority ethnic groups <a href="https://theconversation.com/a-look-behind-uks-impressive-unemployment-figures-shows-theyre-not-so-dazzling-33053">or creating secure and satisfying employment</a>. </p>
<p>The welcome measures in the budget, such as raising the minimum wage, promising to crack down on tax evasion and raising the personal tax free allowance, are outweighed by non-progressive policies, such as the commitment to raise the higher rate tax threshold to £50,000, and non-sustainable policies, such as tax cuts for the North Sea oil industry.</p>
<h2>Higher education</h2>
<p><strong>Paul Wakeling, Senior Lecturer, Department of Education, University of York</strong></p>
<p>The chancellor’s announcement of income-contingent loans of up to £25,000 to support research degree study comes as a considerable surprise. In contrast to the loans of up to £10,000 to support taught masters-level study, there had been no lobbying campaign or call for such funding. Instead, universities and higher education representative bodies had been speculating whether further details of the loans package announced in the Autumn Statement would coincide with the budget. Ministers now have only a few days to launch that consultation before pre-election <a href="http://www.parliament.uk/business/publications/research/briefing-papers/SN05262/election-purdah-or-the-preelection-period">purdah</a> begins.</p>
<p>The budget documents are very light on detail. Immediate concerns that the government would be looking to replace research council stipends with loans seems to be assuaged with the statement that the loans “would be in addition to existing funding”. The loan solution appears once again to be used as a means to expand public support without providing this through direct funding, passing the cost on to the student. There is no stipulation of who would be able to borrow, when and under what terms.</p>
<p>In contrast to masters study, where nearly <a href="http://blog.hefce.ac.uk/2014/11/05/student-loans-for-postgraduate-study-a-look-at-the-facts/">three quarters of students pay their own way</a>, only around <a href="http://www.hefce.ac.uk/media/hefce/content/pubs/2011/201133/11_33.pdf">one third of current domestic PhD students</a> are self-funding. Demand may therefore be limited.</p>
<h2>Environment</h2>
<p><strong>Steffen Böhm, Director, Essex Sustainability Institute, University of Essex</strong></p>
<p>Osborne’s latest budget has extended the freeze on fuel duty increases again, the fourth year in a row he’s done so. At the same time, he’s offered generous tax cuts and investment stimuli for the UK’s North Sea oil and gas industry. This is nothing less than a slap in the face to those who are trying hard to come to an agreement in Paris later this year at the all-important UN climate change conference (<a href="http://www.cop21.gouv.fr/en">COP21</a>), not to mention the UK’s <a href="http://www.businessgreen.com/bg/news/2400327/budget-2015-george-osborne-delivers-barren-budget-for-green-economy">home-grown renewable energy industry</a>.</p>
<p>Governments from around the world will try to come to a new global agreement on curbing carbon emissions at COP21 in December. Many think that this will be our last chance to keep temperature increases to below 2°. One would think and hope that a UK government would do all it can to support policies that reduce our addiction to fossil fuels. Not so.</p>
<p>Stimulating demand and supply of fossil fuels at the same time is nothing but a cheap, short-term political gag, and has nothing to do with long-term economic, social and environmental stewardship. The <a href="http://www.legislation.gov.uk/ukpga/2008/27/contents">UK’s Climate Change act</a> requires us to take this long-term view, committing successive governments to the goal of lowering greenhouse gas emissions by at least 80% compared to the 1990 baseline. Osborne has made it just this little bit harder to achieve that goal. </p>
<h2>Digital economy</h2>
<p><strong>Gordon Fletcher, Centre for Digital Business, University of Salford</strong></p>
<p>Today’s budget statement revealed an insight into the current government’s attitude towards technology. The most obvious commitment was to increase fast broadband for all across the UK, as well as moves to improve 4G. This shows a recognition of broadband and mobile services as essential digital utilities.</p>
<p>Improved bandwidth and fast broadband is fundamental to seeing the UK’s digital economy thrive. It will enable more people to trade through ecommerce channels – both with British and international companies. As Osborne stated, it is also a precursor to developing an <a href="https://theconversation.com/explainer-the-internet-of-things-16542">Internet of Things</a>.</p>
<p>The Internet of Things received attention in the budget with a somewhat vague commitment to funding. Little detail was given except for the poor example of a desire to control the household fridge through a mobile app – though this was a cheap jibe at the leader of the opposition. </p>
<p>Perhaps naively the allocation in the budget of funding for driverless vehicles was treated as a separate item and yet integrating driverless delivery vans with goods bought online is probably one of the biggest upcoming business technology challenges for the Internet of Things that can be imagined.</p><img src="https://counter.theconversation.com/content/38997/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Tony Yates is an occasional consultant for the Norges Bank and Oxford Economics.</span></em></p><p class="fine-print"><em><span>David Spencer receives funding from the EU FP7, EPSRC, and ESRC.</span></em></p><p class="fine-print"><em><span>Karen Rowlingson receives funding from the Arts and Humanities Research Council, Leverhulme Trust and the Friends Provident Foundation. She is a member of the Child Poverty Action Group and Fabian Society.</span></em></p><p class="fine-print"><em><span>Kate Pickett is co-founder and on the board of The Equality Trust.</span></em></p><p class="fine-print"><em><span>Paul Wakeling receives funding from ESRC and HEFCE for research related to the latter's Postgraduate Support Scheme 2014/15.</span></em></p><p class="fine-print"><em><span>Steffen Böhm has received funding from the ESRC, British Academy, the East of England Cooperative Society and the Green Light Trust.</span></em></p><p class="fine-print"><em><span>Gordon Fletcher, Jonquil Lowe, Prem Sikka, and Stephen Roper do not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and have disclosed no relevant affiliations beyond their academic appointment.</span></em></p>George Osborne has delivered his fifth and final budget before the general election. Our academic experts respond.Tony Yates, Reader in Economics, University of BristolDavid Spencer, Professor of Economics and Political Economy, University of LeedsGordon Fletcher, Co-director, Centre for Digital Business, University of SalfordJonquil Lowe, Lecturer in Personal Finance, The Open UniversityKaren Rowlingson, Professor of Social Policy, University of BirminghamKate Pickett, Professor of Epidemiology, University of YorkPaul Wakeling, Senior Lecturer, University of YorkPrem Sikka, Professor of Accounting, Essex Business School, University of EssexSteffen Böhm, Professor in Organisation & Sustainability, University of ExeterStephen Roper, Professor of Enterprise and Director of the Enterprise Research Centre, Warwick Business School, Warwick Business School, University of WarwickLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/389372015-03-17T18:59:30Z2015-03-17T18:59:30ZBudget 2015: Osborne may point to recovery but a nasty shock lies ahead<p>In Britain budget day can prove a non-event or a shock to the political and economic system. Most of Gordon Brown’s budgets fell into the former category, serving as vehicles for the Labour chancellor to remind one and all of the great job he was doing rescuing the UK economy from boom and bust (and <a href="http://www.theguardian.com/commentisfree/2012/feb/06/gordon-brown-save-world-uk">sometimes the world economy</a> too). </p>
<p>In contrast, the current chancellor opts more for the “shock therapy” approach in his handling of the UK economy. Notable was his <a href="http://www.telegraph.co.uk/finance/budget/7846849/budget-2010-full-text-of-george-osbornes-statement.html">“emergency” budget statement in June 2010</a> that – to the surprise of most people in Britain – he embarked upon the most severe expenditure cuts since Labour prime minister <a href="http://www.bbc.co.uk/history/historic_figures/macdonald_ramsay.shtml">Ramsay MacDonald’s national government</a> in the 1930s.</p>
<p>Ahead of the big event, some effort is necessary to clear away the fog that veils what is a particularly political budget, coming as it does so close to the general election. Some have predicted that recent improvements in the UK’s public finances (largely due to the fall in oil prices) means Osborne <a href="http://www.ft.com/cms/s/0/cb0a14f0-c687-11e4-a13d-00144feab7de.html#axzz3UfFGBe7r">can afford to be more flexible</a> and less severe in wielding his austerity axe.</p>
<p>Those who predict the chancellor’s swing towards moderation point to the quite extraordinary warning by the head of the National Audit Office that the cuts in public expenditure over the last five years have been too much too fast (“radical surgery” is the <a href="http://www.ft.com/cms/s/0/8503efec-c8e1-11e4-b43b-00144feab7de.html#axzz3UdePrso8">term used</a>). Indeed, consensus among economists is that austerity <a href="https://theconversation.com/the-graph-george-osborne-doesnt-want-you-to-see-38925">stunted the UK’s GDP growth</a>. </p>
<h2>Austerity corner</h2>
<p>But Osborne has painted himself into an austerity corner. As <a href="http://theconversation.com/its-too-late-for-the-tories-to-get-the-deficit-under-control-38454">I</a> and <a href="https://theconversation.com/unprecedented-austerity-past-and-present-is-set-to-continue-whoever-gets-elected-in-may-38665">others</a> have written, the chancellor is certain to miss his target for deficit reduction, thereby failing to meet his June 2010 budget promise to reach a small budget surplus in 2015-2016.</p>
<p>So Osborne finds himself in a quandary. Unless we allow him to conveniently ignore his 2010 promise, a flexible budget will contradict his five-year effort to eliminate borrowing. Flexibility implies he would allow more expenditure than planned just when the planned expenditure is too much to achieve his long-sought goal.</p>
<p>A second problem facing the chancellor is whether to boast of his prowess in generating a recovery of the UK economy. Much of the media has given him a free ride for his unlikely claim. Rarely do journalists point out that according to research by the UK Office of National Statistics, this has been the <a href="http://www.ons.gov.uk/ons/rel/elmr/economic-review/july-2013/art-economic-review--july-2013.html#tab-Summary">slowest recovery on record</a>. However, a danger considerably greater than the ONS study lurks in the near future.</p>
<h2>Slowing economy</h2>
<p>Several economic indicators suggest the economy will slow down. First, <a href="http://www.ft.com/cms/s/0/e8107720-c965-11e4-a2d9-00144feab7de.html">the level of construction activity was down</a> by 3.1% this January compared to January 2014. Worse for immediate prospects of recovery, <a href="http://www.ons.gov.uk/ons/rel/construction/output-in-the-construction-industry/january-2015/stb-construction-january-2015-and-new-orders-q4-2014.html">latest statistics</a> show it down by 2.5% from December to January alone. </p>
<p>Second, while up by a rather meagre 1.3% compared to a year before, manufacturing output was down by 0.5% between December and January. This is a blow to <a href="http://www.ft.com/cms/s/0/fbfb314c-c7d2-11e4-8210-00144feab7de.html?siteedition=uk#axzz3UdePrso8">hopes</a> that the sector, a marker of the country’s economic health, is recovering.</p>
<p>Third, from November 2014 to January 2015, <a href="http://www.ft.com/cms/s/0/01e17a9e-c89b-11e4-b43b-00144feab7de.html#axzz3UdePrso8">the UK trade deficit was at its lowest in 14 years</a>. Usually this would be good news, but not in this case. Half of the improvement resulted from the fall in oil prices (the UK being a net importer), and the other half from lower imports. In growing economies imports do not fall, they increase as households buy more goods and companies purchase inputs from abroad. And here again the December to January news is bad for recovery – exports were <a href="http://www.ft.com/cms/s/0/01e17a9e-c89b-11e4-b43b-00144feab7de.html">down by 3.1%</a>.</p>
<h2>Dilemma</h2>
<p>The chancellor’s dilemma is obvious. Does he boast of recovery, only to have the Office of National Statistics a week before the election release statistics (due on April 28) showing a major slowdown in the economy for the first quarter of 2015? Or does he hedge on the boast and face the slings, arrows and ridicule of the opposition?</p>
<p>It is quite possible that Osborne can finesse, obscure and escape these problems through well-designed spin. He might handle the austerity/flexibility contradiction by a bit of smoke-and-mirrors arithmetic that allows him to claim both deficit reduction and gentler cuts. In the case of a fall in the quarterly growth rate he could play up the year-on-year result, certain to be over 2% unless the first quarter numbers are very bad indeed.</p>
<p>How successful he is in avoiding the pitfalls and hostages to fortune will depend on the vigilance of the mainstream press. The opposition, meanwhile, should be prepared to jump on these two issues.</p><img src="https://counter.theconversation.com/content/38937/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>John Weeks does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>Austerity has not been a success for the Chancellor, but that won’t stop him from trying to paint is as such.John Weeks, Professor Emeritus, SOAS, University of LondonLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/389252015-03-17T15:32:46Z2015-03-17T15:32:46ZThe graph George Osborne doesn’t want you to see<p>Tax and other giveaways are a common feature of budgets. This year’s being so close to the election, we can expect to see some voter-friendly policies. <a href="https://theconversation.com/budget-2014-experts-respond-24591">Last year’s budget</a> included raising the income tax personal allowance, pensioner bonds for the over 65s and cancelling increases in fuel duty. </p>
<p>But George Osborne was supposed to be the chancellor who put deficit reduction centre stage. If he wins the next election, he is promising much larger cuts in public spending than any of his opponents. How does this square with all these tax breaks?</p>
<h2>Emphasis on the deficit</h2>
<p>When his government was elected in 2010, Osborne <a href="http://www.telegraph.co.uk/finance/budget/7847880/Budget-2010-George-Osborne-delivers-medicine-for-the-deficit.html">proposed a plan</a> to eliminate the deficit by 2015. The plan was enacted over the next couple of years, along with sharp cutbacks in public investment such as school repairs and flood protection. These did considerable damage to the real economy. </p>
<p>The <a href="http://budgetresponsibility.org.uk/wordpress/docs/Forecast_evaluation_report_2014_dn4H.pdf">Office of Budget Responsibility estimates</a> that austerity reduced growth by 1% in both the first two years of the coalition government. This is almost certainly an underestimate, with a lot of recent research suggesting that cuts to government spending have a larger and more sustained impact <a href="http://www.voxeu.org/article/when-time-austerity">when an economy is already depressed</a>. It is therefore fair to say the coalition’s cuts delayed the UK’s recovery from recession.</p>
<p>In 2012 Osborne quietly changed this plan. We can see this clearly in the chart below. Deficit reduction stopped or slowed. The official line was that he was sticking to his “long-term plan”, but as recent tax giveaways show, reducing the deficit is no longer the number one priority. </p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/75063/original/image-20150317-22285-7jpadu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75063/original/image-20150317-22285-7jpadu.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=360&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75063/original/image-20150317-22285-7jpadu.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=360&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75063/original/image-20150317-22285-7jpadu.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=360&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75063/original/image-20150317-22285-7jpadu.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=452&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75063/original/image-20150317-22285-7jpadu.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=452&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75063/original/image-20150317-22285-7jpadu.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=452&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">UK government current deficit, as % of GDP.</span>
<span class="attribution"><span class="source">Office for Budget Responsibility</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Many commentators at the time saw this change of plan as a prudent reaction to the lack of economic recovery. The economy did indeed start a sustained recovery one year later, and putting austerity on hold in 2012 clearly helped that happen. It was also clear by 2012 that the threat from market reaction to large budget deficits had been greatly exaggerated – <a href="http://mainlymacro.blogspot.co.uk/2014/12/government-debt-financial-markets-and.html">if it had existed at all</a>. </p>
<p>Interest rates on UK government debt continued to fall. In September 2012 the eurozone crisis was solved by the European Central Bank agreeing in principle to buy the debt of its troubled economies, something which the Bank of England had already been doing for the UK as part of its quantitative easing programme.</p>
<h2>State-shrinking strategy</h2>
<p>However perhaps we should have taken the chancellor at his word when he says that there has been no change to his long-term plan. The mistake was to misunderstand what this plan was. In reality it may have had nothing to do with the deficit, but instead was all about shrinking the size of the state over a ten-year period. </p>
<p>The problem the Conservatives faced in 2010 was that there was no public appetite for a smaller state. Surveys continued to <a href="http://www.bsa-data.natcen.ac.uk/?_ga=1.268044813.2021226278.1410787689">show</a> many more people wanted higher government spending and taxes than wanted the opposite (with a large percentage wanting neither). A focus on the government deficit presented them with an ideal opportunity to achieve a smaller state by the back door. </p>
<p>It was natural for people to believe that in a recession the government needed to tighten its belt – just as individuals or firms were doing – even if that policy would have Keynes turning in his grave. With more than 80% of deficit reduction taking the form of spending cuts, the deficit reduction plan was in effect a state reduction plan.</p>
<p>The only problem with this strategy is that, as we saw in the coalition’s first two years, it would seriously damage the economy, just as Keynes would have predicted. The chancellor has never rejected Keynesian analysis, so perhaps he was well aware of this. So the plan may have always included a temporary pause to austerity before the election, giving the economy time to recover and the chancellor scope for what he hoped would be election winning tax giveaways.</p>
<h2>The real plan</h2>
<p>So the real long-term plan was an initial two years of sharp cuts to public spending and the deficit, to be followed by budgets involving tax cuts that would allow growth to resume but rather less deficit reduction. If this combination was enough to win the subsequent election, the recipe could be repeated all over again. Indeed, this is what George Osborne’s post-2015 plans look like. All done in the name of deficit reduction, when the real aim is to reduce the size of the state.</p>
<p>For this plan to work, you need one extra ingredient: a compliant media that buys into the idea that deficit reduction is all important, and that recent growth somehow vindicates the earlier austerity. What you want to avoid at all costs are pictures like the one below, which show the economy slipping even further away from its long-run growth trend as a result of austerity.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/75064/original/image-20150317-22259-akvx7w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/75064/original/image-20150317-22259-akvx7w.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=286&fit=crop&dpr=1 600w, https://images.theconversation.com/files/75064/original/image-20150317-22259-akvx7w.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=286&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/75064/original/image-20150317-22259-akvx7w.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=286&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/75064/original/image-20150317-22259-akvx7w.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=360&fit=crop&dpr=1 754w, https://images.theconversation.com/files/75064/original/image-20150317-22259-akvx7w.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=360&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/75064/original/image-20150317-22259-akvx7w.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=360&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">UK GDP per head, logged, and its long term trend.</span>
<span class="attribution"><a class="source" href="http://www.ons.gov.uk/ons/datasets-and-tables/data-selector.html?cdid=IHXW&dataset=ukea&table-id=X11.">Office for National Statistics</a>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>Unfortunately, nothing like this chart will appear in any of the Treasury’s budget day briefing.</p><img src="https://counter.theconversation.com/content/38925/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Simon Wren-Lewis does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>George Osborne has repeatedly managed to promise tax cuts and deficit reduction – and we can expect more of the same in this year’s budget.Simon Wren-Lewis, Professor of Economics, and Fellow of Merton College, University of OxfordLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/388122015-03-17T06:23:34Z2015-03-17T06:23:34ZHow budget 2015 could open a coalition can of worms<p>Most of the commentary in the build up to the last Budget of this Parliament will, predictably, focus on the contents of George Osborne’s little red briefcase on March 18. </p>
<p>Few will focus on the logistics of what could happen after – the parliamentary procedure for implementing budgets. That’s because these are usually pretty uncontroversial. Budget announcements usually get rubber stamped through parliament with little fuss and bother.</p>
<p>But <a href="https://theconversation.com/budget-2015-could-see-a-government-shutdown-in-the-uk-19634">maybe not this time</a>. With only 50 days between the Budget and the general election, we may well see some political posturing from not just the opposition, but the coalition’s junior partner that could challenge the budget’s passage through parliament.</p>
<h2>Parliamentary procedure</h2>
<p>The House of Commons <a href="http://www.publications.parliament.uk/pa/cm201011/cmstords/700/700.pdf">Standing Order 48</a> effectively prevents – for spending – anyone putting forward public spending proposals other than “the Crown”. No, not the Queen – in this case it means the government (though it is officially <a href="http://www.parliament.uk/mps-lords-and-offices/government-and-opposition1/her-majestys-government/">Her Majesty’s Government</a> in our system, remember).</p>
<p>This rule has been extended, in practice, to proposals for taxation – so only the Crown can propose to maintain, or raise, or introduce new taxes.</p>
<p>This somewhat bizarre provision means all MPs can do is either endorse the government’s proposed spending plans or and, although this happens very rarely, propose to reduce spending (or taxes) on something or other. They could also, in theory, reject all the spending (and tax) proposals – although to my knowledge that has never been tried in modern times.</p>
<p>Many believe that any rejection or reduction of a tax or spending proposal would be tantamount to a vote of “no confidence” in the government of the day – and therefore trigger its resignation and an election. This helps to explain why, in more than 100 years, there have been only about 20 successful attempts in the British parliament to amend the government’s tax-and-spend proposals. Interestingly, none of them was regarded as a confidence vote; no government fell and no elections were called as a result of these defeats. </p>
<p>The 20 or so times there have been revolts in parliament over specific tax or spending measures in the past century have nearly all been non-party affairs. The political parties – especially the main two – have not sought to discomfort the party in office when in opposition. The main reason for this, as with many other aspects of our quasi-monarchical state, is that they hope themselves one day to be in office and operate the Crown prerogative powers of the executive.</p>
<h2>Possibility of budget disruption</h2>
<p>Two factors since the last election could change this. The <a href="http://www.parliament.uk/business/publications/research/briefing-papers/SN06111/fixedterm-parliaments-act-2011">Fixed Term Parliaments Act</a> of 2011 lays to rest, at least in law, the idea that any defeat on a finance or supply motion is automatically a vote of (no) confidence. The act spells out precisely what does constitute a vote of confidence. </p>
<p>The second development is the coalition government. In this new multi-party, coalitional world of Westminster who knows what will happen after March 18.</p>
<p>Will George Osborne include in his Budget any proposals that the Conservatives’ coalition partners, the Liberal Democrats, do not agree with? And if he does would they dare join forces with Labour and others to vote down spending or tax proposals they don’t like?</p>
<p>Could the Liberal Democrats take the initiative and, in a bid to differentiate themselves from the Conservatives, put forward some highly symbolic amendment of their own on tax or spending – for example rejecting some Tory tax cut aimed at boosting Conservative chances in the general election?</p>
<p>Could Labour do the same? Or the SNP put forward an amendment to cut defence spending on Trident (their symbolic differentiator from Labour)? Or the two UKIP MPs propose amendments to not pay our subs to Brussels?</p>
<p>There are all sorts of possibilities. But my guess at the moment is that Westminster traditions are still too strong. They are so entrenched that most MPs in the House of Commons won’t even realise they could make all sorts of mischief even within the arcane restraints of Standing Order 48 and parliamentary customs. </p>
<p>But I’d also guess these fetters on parliament will not long survive another coalition, or even more likely minority government, after May 2015. The chances that parliament will eventually get around to repealing Standing Order 48 and asserting real, as opposed to purely titular, parliamentary sovereignty over “getting and spending” is becoming ever more likely.</p><img src="https://counter.theconversation.com/content/38812/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Colin Talbot does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>With only 50 days between the Budget and the general election, we may well see unprecedented political posturing from not just the opposition, but the coalition’s junior partner too.Colin Talbot, Professor of Government, University of ManchesterLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/388612015-03-16T14:30:39Z2015-03-16T14:30:39ZOsborne’s reforms may not give pensioners the freedom they seek<figure><img src="https://images.theconversation.com/files/74926/original/image-20150316-9181-4w789x.jpg?ixlib=rb-1.1.0&q=45&auto=format&w=496&fit=clip" /><figcaption><span class="caption">On top of your savings?</span> <span class="attribution"><span class="source">www.shutterstock.com</span></span></figcaption></figure><p>George Osborne <a href="https://www.gov.uk/government/news/pension-freedoms-to-be-extended-to-people-with-annuities">has announced</a> that up to 5m pensioners will be able to sell their existing, regular retirement income for cash lump sums. A consultation on how the measure will work will be announced in this week’s budget. But the chancellor is expected to extend pension changes from April 2016, to allow people who have already bought an annuity – a type of insurance that pays an income for life – to cash it in for a fixed lump sum.</p>
<p>The announcement builds on the far-reaching reforms of the pension system <a href="https://theconversation.com/budget-2014-there-could-be-a-sting-in-the-tail-for-savers-and-pensioners-24609">announced in last year’s budget</a>. From April 6, radical new pension freedoms come into effect that allow savers to draw out their savings when they like and in any way that they like – as cash lump sums, income or a mixture of both. This widens their options beyond simply buying an annuity which in the past, because of tax and charges, was the usual option. Osborne’s latest measure will extend the new freedoms to people who had already bought an annuity and therefore lost out on last year’s reforms.</p>
<p>For some this has been celebrated for the freedom it gives people over their own finances going into retirement. It is likely to be popular with older voters. But freedom brings with it potential pitfalls for those who wish to sell their annuity – and not because they can’t be trusted to blow their money on profligate spending. Rather, getting a good return on selling your annuity could be a lot more complicated than people expect.</p>
<h2>Planning for retirement</h2>
<p>A key question for anyone reaching retirement is: how long will my savings need to last? Most of us cannot know how long we personally will live. Using part or all of your pension pot to buy an annuity removes the risk of outliving your savings.</p>
<p>An annuity works by pooling together a group of people of similar age. The excess money left over when someone in the pool dies younger than average is used to fund the ongoing income to people who live longer than average. As with all insurance, with hindsight some people will have claimed (in this case, received income for a long time) and others will not, but all will have had the peace of mind that their income would have carried on however long they lived.</p>
<figure class="align-center ">
<img alt="" src="https://images.theconversation.com/files/74930/original/image-20150316-9214-19uzjui.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&fit=clip" srcset="https://images.theconversation.com/files/74930/original/image-20150316-9214-19uzjui.png?ixlib=rb-1.1.0&q=45&auto=format&w=600&h=450&fit=crop&dpr=1 600w, https://images.theconversation.com/files/74930/original/image-20150316-9214-19uzjui.png?ixlib=rb-1.1.0&q=30&auto=format&w=600&h=450&fit=crop&dpr=2 1200w, https://images.theconversation.com/files/74930/original/image-20150316-9214-19uzjui.png?ixlib=rb-1.1.0&q=15&auto=format&w=600&h=450&fit=crop&dpr=3 1800w, https://images.theconversation.com/files/74930/original/image-20150316-9214-19uzjui.png?ixlib=rb-1.1.0&q=45&auto=format&w=754&h=566&fit=crop&dpr=1 754w, https://images.theconversation.com/files/74930/original/image-20150316-9214-19uzjui.png?ixlib=rb-1.1.0&q=30&auto=format&w=754&h=566&fit=crop&dpr=2 1508w, https://images.theconversation.com/files/74930/original/image-20150316-9214-19uzjui.png?ixlib=rb-1.1.0&q=15&auto=format&w=754&h=566&fit=crop&dpr=3 2262w" sizes="(min-width: 1466px) 754px, (max-width: 599px) 100vw, (min-width: 600px) 600px, 237px">
<figcaption>
<span class="caption">You’ll probably live longer than you think.</span>
<span class="attribution"><span class="source">Jonquil Lowe</span>, <a class="license" href="http://creativecommons.org/licenses/by/4.0/">CC BY</a></span>
</figcaption>
</figure>
<p>The cost of an annuity depends not just on how long people will live on average, but also on long-term interest rates. Since the global financial crisis, interest rates, and therefore annuity income, have been <a href="http://www.ilcuk.org.uk/index.php/publications/publication_details/whither_uk_annuities">dismally low</a>. Once bought, an annuity cannot be reversed. So until now, if you’ve bought an annuity when rates were low, you’ve been locked into a low income for life. The new measures offer an escape route from this low income – but at what price?</p>
<h2>Buying and selling</h2>
<p>Under the new measures, the annuity will not be cancelled. Instead, you’ll be able to sell it to a willing buyer. The buyer will then receive the income from the annuity for as long as you live. When you die, the buyer’s income stops. </p>
<p>It follows that the buyer will want to estimate how long you will live before making you an offer. So, it seems likely, that anyone wanting to sell an annuity will be required to provide medical evidence before a price can be set. Since buyers are likely to be cautious and there will be some charges for administering the deal, you could end up being paid a lot less for your annuity than you might expect and certainly less than it would cost you to buy the income back.</p>
<p>Buyers are expected to be big institutions, such as insurance companies and pension funds. Osborne <a href="https://www.gov.uk/government/news/pension-freedoms-to-be-extended-to-people-with-annuities">acknowledges</a> that buying second-hand annuities would not be suitable for personal investors “owing to the complexity and difficulty in determining a fair price”. This complexity and difficulty – particularly over-estimating how long the original policyholder might live – was why in 2011 the similar sale of second-hand life insurance policies (so-called “death bonds”) was <a href="http://www.fsa.gov.uk/consumerinformation/product_news/saving_investments/tlpis">dubbed by the Financial Services Authority, then the UK financial regulator, as “toxic”</a> and banned from sale to mass-market investors.</p>
<p>If the uncertainty over pricing second-hand annuities makes them unsuitable for private investors, it’s hard to see how the same problems will not beset the annuity sellers. </p>
<p>The government has said that its new Pension Wise service will provide guidance and that it will be working with the Financial Conduct Authority (the current UK financial regulator) to support annuity sellers. Given the personal nature of selling your retirement income based on your expected lifespan – and the <a href="https://theconversation.com/the-governments-new-pension-service-has-one-fatal-flaw-37726">inherent difficulties of calculating this</a> – the small print of selling on existing annuities is likely to be very difficult. So the freedom that these new reforms bring will be complex and would-be annuity sellers will need good advice that goes beyond the mere guidance that Pension Wise can provide.</p><img src="https://counter.theconversation.com/content/38861/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Jonquil Lowe does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>The chancellor has announced a voter-friendly annuity escape plan. But just how much freedom this gives pensioners should be questioned.Jonquil Lowe, Lecturer in Personal Finance, The Open UniversityLicensed as Creative Commons – attribution, no derivatives.tag:theconversation.com,2011:article/386862015-03-16T06:21:48Z2015-03-16T06:21:48ZWhat you need to know about the deficit ahead of the Budget<p>The final Budget before the general election is fast approaching. Separated from the election by just 50 days, it is not likely to lack political content. But the key issue remains the deficit – and how successful George Osborne can claim the government has been at tackling it.</p>
<p>In the forecasts produced for the June 2010 Budget, the <a href="http://budgetresponsibility.org.uk/wordpress/docs/junebudget_annexc.pdf">Office for Budget Responsibility</a> anticipated that the deficit on the government’s current budget would be eradicated by 2015-16. Its <a href="http://cdn.budgetresponsibility.independent.gov.uk/December_2014_EFO-web513.pdf">most recent forecast</a> of the deficit in that year is £49.4 billion. If achieved, this would represent a substantial cut of the deficit (which, in 2009-10 was <a href="http://www.parliament.uk/business/publications/research/key-issues-for-the-new-parliament/the-public-finances/the-economic-recovery-and-the-deficit/">well over £100 billion</a>), but it would represent a serious underachievement when set alongside the initial target.</p>
<p>Progress toward the goal of deficit eradication has been patchy. As a proportion of GDP, the deficit fell by more than 20% over 2010 and 2011, <a href="https://theconversation.com/unprecedented-austerity-past-and-present-is-set-to-continue-whoever-gets-elected-in-may-38665">but has fallen slowly since</a>. Put simply, in terms of rushing to cut the deficit, there was an unheralded U-turn in 2012. The effect of that U-turn on growth has been positive, but for a government determined to eradicate the deficit there remains unfinished business. </p>
<p>Indeed, with all major political parties committed to restoring something close to fiscal balance by the end of the next parliament, we can expect further savage cuts in government spending – <a href="http://www.ifs.org.uk/uploads/gb/gb2015/gb2015.pdf">and probably some subtle tax hikes too</a>. Indeed whether the parties’ aspirations for public borrowing are achievable over the timescale of a (further) single parliament is moot.</p>
<p>What might appear curious is that, at a time when GDP is growing by <a href="http://www.ons.gov.uk/ons/dcp17177_8_394742.pdf">almost 3% per annum</a>, it should be possible for government to run a surplus. The ready reckoner of fiscal policy entails running a deficit to stimulate demand when times are bad, and pay that back when times are good. So why is it proving so difficult to reduce the deficit now?</p>
<p>The difficulty faced by the government is that, while demand management policy is usually achieved by some mix of monetary and fiscal policies, it currently has only one of those tools at its disposal. The Bank of England has held its interest rate at an all-time low of 0.5% since early 2009 – what some economists like to call the <a href="http://www.investopedia.com/terms/z/zero-bound.asp">“zero lower bound”</a>. </p>
<p>Using conventional monetary policy to stimulate the economy – by lowering the interest rate – has not been an option for the last six years. At other times it might have been possible to reduce the fiscal deficit while still stimulating the economy through monetary policy. Fiscal policy has had to do all the work on its own this time.</p>
<h2>Investment, productivity and incomes</h2>
<p>All of this adds up to a requirement that the government should be smart (smarter than usual, perhaps) in making its decisions about spending and taxation. Spending on investment to improve the nation’s infrastructure – where the return on that investment is high – should be welcome. </p>
<p>It should be doubly welcome where this investment can bring further increases in private sector investment, and where it can result in substantial gains in labour productivity. The flatlining of productivity in recent years largely explains the <a href="https://theconversation.com/a-look-behind-uks-impressive-unemployment-figures-shows-theyre-not-so-dazzling-33053">failure of real wages to recover</a> from their post-recession low. Breaking out of the vicious circle in which low wages are paid to workers who are not equipped to become productive should be a priority.</p>
<p>So far, the recovery has largely been one of output and jobs – <a href="http://www.ons.gov.uk/ons/dcp171778_390755.pdf">only very recently have wages increased</a> (and even then only to a modest extent). This has, in itself, exacerbated the difficulties faced by the Treasury, since the sluggish growth in incomes has led to a disappointing recovery of tax revenues. The government could make it easier for businesses to raise wages by offering some targeted relief on national insurance contributions.</p>
<p>The speed at which the budget deficit is to be closed remains a contentious issue. The experience of the years before the 2012 U-turn confirmed that it is possible to go too fast, and that growth can be strangled by an excessive zeal in deficit reduction. </p>
<p>There is some difference between the main political parties on the appropriate speed of retrenchment – though arguably not as much as you might expect. Whatever the details of the Budget, voters will have a chance to have their say when it comes to this longer term decision in May. The Budget will chiefly be interesting for the rabbit that, for political reasons, the Chancellor will surely pull out of his hat. But it will only be the appetiser for the meal that will follow 50 days later.</p><img src="https://counter.theconversation.com/content/38686/count.gif" alt="The Conversation" width="1" height="1" />
<p class="fine-print"><em><span>Geraint Johnes does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.</span></em></p>A look at how the UK economy is doing ahead of what’s set to be a political budget from Conservative Chancellor George Osborne.Geraint Johnes, Professor of Economics, Lancaster University, and Director of the Work Foundation, Lancaster UniversityLicensed as Creative Commons – attribution, no derivatives.