David Gauke is Exchequer Secretary to the Treasury and the MP for South West Hertfordshire.
The British economy began turning a few months ago. As the Chancellor has set out in his Autumn Statement, growth, employment and the prospects for business investment are up; borrowing, inflation and unemployment are down. The Labour Party’s macro-economic critique of Government policy – that we were cutting “too far, too fast” – is discredited. According to the Ed Balls view of economics, none of the good news we have heard in the last few months could have happened.
We don’t hear much of that argument anymore. Indeed, the collapse of that argument partially explains Ed Balls’ dismal Parliamentary performance in response to the Autumn Statement.
Instead, our opponents focus on living standards. It is true that for many people times have been tough and their wages have fallen behind inflation. The Government has taken action to help in terms of increases in the personal allowance and freezes in council tax and fuel duty. Our economic credibility has kept mortgage rates low. This week, we have followed that up by rolling back green levies on energy prices, restricting rail fare increases in line with inflation and helping businesses with business rates. Of course, if we hadn’t been left with a crippling deficit, we could do more. But borrowing more to address the cost of living would be irresponsible.
The real challenge for Government is not just addressing the short term challenges but also putting in place the conditions for sustainable increases in prosperity. The truth is that, as the Governor of the Bank of England has said, “ultimately the growth in real wages is going to be determined by recovery in productivity in the economy”.
It has recently become fashionable to argue that the link between productivity and wage growth has been broken. It is an important, if technical, argument that lies at the heart of Ed Miliband’s economic case. It is also deeply misleading and allows him to avoid addressing the question of how Labour would improve productivity. So it is worth taking a moment to de-bunk it.
Numbers from the Office of National Statistics and the Treasury show that output per worker and real compensation per employee have moved broadly in line with each other up to the financial crisis, with the share of output going to the employee actually increasing since then. But wages and salaries only make up one part of employee compensation. The remainder is made up of social contributions such as pension costs and employer National Insurance contributions. This element increased significantly between 1997 and 2010, not least because of Labour’s increases in employers NICs. In other words, to the extent that wages have not kept up with productivity much of it is as a consequence of Labour’s higher taxes, not a breaking of the link between compensation and productivity. Cutting employers NICs, as we did by raising thresholds in 2010 and will do by the introduction of the Employment Allowance next year, will mean that a greater proportion of productivity growth will end up in wages.
Addressing productivity levels requires long term policies. But what is striking about Ed Miliband’s musings on the cost of living is how little interest he shows in the subject.
If we want higher levels of productivity, we need a world class education system. Instead, the last Labour Government left us in a mid-table position falling behind our competitors. It is Michael Gove who is now relentlessly driving up standards. Meanwhile, as a Government, we have made higher education funding sustainable and this week we have announced a further expansion in places. We have also increased substantially the number of apprenticeships and will ensure that get more out of the money spent in this area. Anyone know what Labour thinks on these issues?
A world class transport infrastructure is key. Again, Labour failed to make the progress it should have done when in office, planned to dramatically cut back capital spending in this Parliament and, on the single biggest transport infrastructure project set for implementation, HS2, changes its position on a regular basis. It is this Government that has introduced an ambitious National Infrastructure Plan.
A productive nation cannot afford a costly welfare system that traps millions on out-of-work benefits. Labour allowed a dependency culture to develop that meant that, even in good years, over five million people were left on out-of-work benefits. It has been left to us to control costs and reform the system to make work pay.
How about business investment? One factor in determining business investment is a competitive tax system. This Government has done more to reduce business taxes over a Parliament than any of our predecessors. As the Treasury’s dynamic analysis of our cuts in corporation tax show, this will result in an increase in business investment by up to 4.5 per cent and increase GDP by up to 0.8 per cent. The Treasury model shows that much of the benefit (at least 42 per cent) will feed into higher wages. Labour’s response? They plan to put up the main rate of corporation tax – the first time a UK Government has done so since 1968. Not only is that specific policy indicating the wrong direction of travel on tax, the general anti-business rhetoric we hear from Mr Miliband is detrimental to attracting investment.
Living standards are not unrelated to economic policy. Only a sustained economic recovery with growing productivity will deliver a sustained and lasting improvement in real earnings. As a Government, on education and skills, infrastructure, welfare and tax, we have pursued policies that will have long term benefits in improved productivity – all part of delivering a responsible recovery. In contrast, the reality is that not only do Labour have nothing to say on fiscal policy, they also have nothing to say on how we achieve that sustainable growth in living standards. This failure makes them a real risk to our economic recovery.