As George Osborne may have mentioned in passing, the Conservative Party has a long-term economic plan.
Item one on the plan is reducing the deficit – with the aim of running a surplus by the end of the decade. The Labour Party claims to have its own long-term economic plan, albeit one that dawdles along on the deficit. The Lib Dems, perhaps looking back to happier times, have positioned themselves somewhere in between.
Do these differences actually matter?
For some perspective, you could do worse than a post by Adam Corlett for the Resolution Foundation. To begin with, he reminds us that the delivery of any fiscal plan depends on a number of external factors:
“Uncertainty over how much the taxman is bringing in, movements in borrowing costs and inflation form part of this sensitivity. Ultimately though, the achievability and consequence of any given deficit target will depend on the outlook for growth, and in particular productivity.”
Productivity is particularly relevant because of the bearing it has on government receipts. In Britain, employment is up and growth is up, but output per hour worked has not followed suit – thereby suppressing wages and the associated tax revenues.
Productivity is now only just beginning to exceed 2008 levels – and a huge amount depends on where it goes next:
“In its last forecast, the Office for Budget Responsibility (OBR) looked at two scenarios to test the sensitivity of its fiscal outlook to the degree of growth in the economy…
“In a ‘weak productivity scenario’ growth in productivity per worker remains at around ½ per cent a year for the next five years, which is broadly in line with its recent trend. In the ‘strong’ scenario, productivity grows at close to 4 per cent a year, as it did in the early 1970s and 1980s.”
Both of these scenarios seem rather extreme, but, as Corlett points out, they’re not without precedent. It’s also worth noting that the strong productivity growth scenario, if achieved over the remainder of the decade, still wouldn’t get us back to where we would have been had the interruption to the pre-recession trend never happened.
OBR projections, which form the basis of all the parties’ fiscal plans, fall between the two extremes giving us a ‘central’ scenario. However, as is often the way with economic forecasts, reality will most likely veer off from the projected path – with highly significant consequences:
“…the difference between the weak and the central productivity scenarios, or between strong and central, (let alone between weak and strong), is greater than the largest difference between parties.”
“…assuming the parties retained their current fiscal targets, Labour could have to cut more than the current coalition plan – if productivity growth does not return; while the Conservatives could spend far more than Labour currently intend to – if productivity bounces back more strongly than expected.”
All of this implies that we should be more interested in what the parties say about productivity than in their plans for deficit reduction. The difficulty, though, is that we’ve yet to hear any of them give a convincing account of Britain’s productivity puzzle. Why did so much productivity suddenly disappear from the British economy in 2008? What was it that kept productivity growth so steady in the decade previous to the crash and where did it all go?
If our politicians (and economists) can’t explain our recent economic past, then how can we trust them with our economic future?