Saturday, July 27, 2019
Tricky times call for a lucky chancellor
Posted by David Smith at 09:00 AM
Category: David Smith's other articles

My regular column is available to subscribers on This is an excerpt.

There are three ways of viewing Boris Johnson’s first few days as prime minister, and in particular his “fire and hire” approach to his new cabinet. Apart from demonstrating that no job is as insecure as that of a cabinet minister and their special advisers, it was curious man and woman management from a new leader apparently committed to Tory unity, and needing the loyalty of his MPs in coming weeks.

The smart money in the markets and the view of many in Westminster is that stepping up no-deal preparations and insisting that the Irish backstop be removed from the withdrawal agreement is all about preparing the country for a “blame somebody else” election in the autumn, in which no-deal opponents in the House of Commons and Brussels are the enemies and the patriotic thing is to support Johnson’s Tories. Risky, particularly with the Brexit Party still around.

The second possibility is that, having filled the cabinet with Brexiteers, they will be obliged to support even modest reassurances offered by the EU in the political declaration, and an orderly Brexit can proceed. Risky too, given that any of them could resign, and the fact that hardline ERG (European Research Group) Tory MPs do not appear to have been bought off by some of their number making it to the cabinet.

The third possibility, a no-deal Brexit, would see the Dunkirk and Blitz spirit being invoked, and the Johnson government taking the rap for the short and long-term consequences, which a few weeks of preparation will not prevent. No doubt Europe would also be blamed.

We shall see. There is no easy way of attaching probabilities to these possibilities, but in broad terms they would run in the order I have set them out, with an election most likely and no-deal Brexit least.

Let me, however, lift my gaze above the short-term uncertainties. We have a new chancellor, Sajid Javid who, unlike some of the other cabinet appointments last week, appears eminently suited to the job. Will he be a good chancellor and, perhaps as importantly, will he be a lucky one?

In some respects he is already lucky. As a result of the combined efforts of George Osborne and Philip Hammond, he inherits a budget deficit which, at £23.5bn or 1.1% of gross domestic product in 2018-19, was the lowest for 17 years. The new administration has to decide what its fiscal rules will be, including whether to stick with the vague target of eliminating the budget deficit by the mid-2020s, but the starting position is a good one.

The labour market, meanwhile, is another bright spot. Unemployment is at its lowest since the mid-1970s and the employment rate – the proportion of working-age people in work – is close to record highs. Average earnings growth, at around 3.5%, is above the 2% inflation rate and providing consumer spending support to the economy. The economy has slowed significantly but things could be a lot worse.

If Javid were to be a really lucky chancellor, however, he would enjoy something denied to both his predecessors, the return to normal rates of productivity growth. Osborne had reason to expect productivity to bounce back after the financial crisis. Instead it stagnated, forcing the Office for Budget Responsibility (OBR) to downgrade the outlook for the public finances. Hammond also presided over productivity that was a mere 1% higher when he left office as when he became chancellor.

This matters. Had productivity over the past decade grown in line with its long-run trend, it would be about 20% higher than it is, with most of that translating into a larger economy. And, for those who think productivity only matters for economists, the Office for National Statistics’ recently calculated that private sector wages would be £5,000 a year higher than they are had productivity achieved trend growth and pay increased accordingly. £5,000 a year is equivalent to an 18% boost in full-time private sector average earnings.

Productivity is due a revival. At 3.8%, the unemployment rate cannot fall much further and the growth of employment, constrained by the availability of workers, has begun to slow.

There is also the promise, so far largely unrealised in this country, of a significant boost to productivity for the new technologies of artificial intelligence and robotics. Though there has often been scepticism about the contribution of new technology to productivity growth – three decades ago the US economist Robert Solow said that you see computers everywhere except in the productivity statistics – there is also a sense that we could be on the brink of something big.

Chancellors, of course, make their own luck. And, while many of the ingredients of higher productivity are long in the making – investment, infrastructure, innovation, skills and education – some things can be done in the short-term.

Britain is suffering from investment starvation. Businesses have been slow to invest since the financial crisis and particularly reluctant since the EU referendum. Expecting that to change until Brexit is clarified is probably for the birds but Javid is, in any case, preparing the ground for an autumn budget.

We know from his leadership bid that he is drawn to the idea of taking advantage of low borrowing costs – the yield on 10-year gilts is currently just 0.71% - to launch a £100bn national infrastructure fund.

There are plenty of good ideas for “levelling up” growth in the regions through increased private investment. The Tory MP and Neil O’Brien set out proposals for enhanced investment allowances in the regions in his recent report, Firing On All Cylinders, for the think tank Onward. He also called for a corporation tax rate of 12.5%, matching that of Ireland. That would go down like a lead balloon in Dublin.

We do not know how long the Johnson government has, and for that matter how long Javid will be at the Treasury. There is an air of the temporary about the Johnson government. Most chancellors have time to get their feet under the table.

Apart from the untimely death of Iain Macleod in 1970, after just a month as chancellor, the shortest serving modern-day chancellor was John Major in 1989-90, 13 months, though he went on to be prime minister.

Assuming Javid can hang around, he could ride the tide of rising productivity and technology. Somebody has to. It is long overdue.