Weak productivity and £13 billion in cuts: A conundrum too far for the Chancellor?

Weak productivity and £13 billion in cuts: A conundrum too far for the Chancellor?

In a speech to the CBI’s annual dinner in London on Wednesday, Chancellor George Osborne admitted that the country must deal with a myriad of problems, ranging from transport and infrastructure to childcare. However, central to the Chancellor’s address was a recognition that a major push to improve productivity was urgently needed.

The productivity puzzle has long been a worrying feature of the UK’s economic recovery. Even with total employment and working hours in the ascendancy, productivity remains stubbornly low resulting in low wage growth and stagnating living standards. As the Organisation for Economic Co-operation and Development has noted “income and wealth are below the G7 average and real earnings have been exceptionally weak as they have continued to reflect poor productivity.”

Contemplating the challenge ahead, the Chancellor stated that “improving the productivity of our country is the route to raising standards of living for everyone in this country” before promising that “by the Budget I will publish our Productivity Plan, our plan to make Britain work better…our future prosperity depends on it.”

However, solving the productivity problem is likely to be tougher than simply identifying it. Osborne has already briefed Whitehall departments on the need to make savings worth some £13 billion by 2017/18, and all, with the exception of ring-fenced departments like Education and International Development, will be expected to dig deep. Importantly, the Tories have promised that there will be no taxes increases, whether direct or indirect, further limiting their manoeuvrability.

Conservative strategy has hinged on the success of the ‘Northern Powerhouse’ project, alongside a range of infrastructure projects: from large-scale transport projects like HS2, to rolling out high-speed broadband across the country.

Squaring the cost of these projects with stringent cuts on day-to-day spending will no doubt prove challenging. In the last Parliament George Osborne demonstrated remarkable levels of political savvy, ably out-flanking his rivals in the Conservative Party, as well as Labour opponents. With the Tories now free to govern alone a weight of expectation has fallen on his shoulders.

A number of new appointments indicate the kind of approach Osborne is likely to take. It is notable that Greg Hands, privately known as the Chancellor’s “enforcer” has become Chief- Secretary to the Treasury, giving him the role of squeezing every penny on Whitehall. However, his appointment is dovetailed with that of Sajid Javid, another of Osborne’s protégés, as Minister for Business, Innovation and Skills.

It seems that the chancellor will drastically cut state spending in the next three years, while relying on Javid to rigorously seeking to realign British business with the needs of the Conservative government. A keen advocate of technology start-ups, it would not be a surprise if the BIS Minister backed Britain’s Business Bank scheme to encourage investment in this area. He is also likely to be ruthless in pushing for an increase in exports and cutting red tape to ease the burden on producers.

Whether three years is a realistic time-frame to undertake such an ambitious operation remains to be seen. It is notable that in their annual ‘Economists’ Survey’ The Financial Times found that the levels of cuts demanded by the Chancellor were “simply not plausible” and there appears to be scepticism from the business community as to whether deregulation will really make an impact. As John Longworth, director-general of the British Chamber of Commerce notes, “every government has said they will cut or limit regulation and has signally failed to do it.”

After their shock election victory the Conservative government are unsurprisingly in high spirits, though how long these will last remains to be seen. With an election on Britain’s membership of the European Union due to take place within the next 18 months and the opposition in a state of disarray, it is possible that scrutiny of British productivity will fall by the way side. This would be a mistake. Though he has had an impressive career to date, tackling this problem would be the Chancellor’s greatest achievement to date. Similarly, however, failure to meet his goals could prove disastrous. Not only would it enable his enemies to round on him, but it would leave an indelible mark on a relatively clean copy book.

Jack Taylor

Jack Taylor

Consultant at Keene Communications
Jack’s background is in domestic politics, having worked in various research position in both the Commons and the Lords. He has a particular interest in matters pertaining to infrastructure, transport and development.
Jack Taylor

About the Author

Jack’s background is in domestic politics, having worked in various research position in both the Commons and the Lords. He has a particular interest in matters pertaining to infrastructure, transport and development.