It’s all looking better than we dared hope: unemployment down again last month, retail sales rising at their fastest rate in 14 years, growth UK-wide higher than expected – and Chancellor Philip Hammond set to announce an infrastructure spending boost in his Autumn Statement this week.
But strong though the case may be for infrastructure spending projects, there are debt and deficit constraints. And searching questions need to be asked on the efficacy of infrastructure spending.
In Scotland, where growth is notably weaker, there are worrying downward pressures ahead on household budgets that will dampen the contribution of consumer spending to growth. Scotland’s draft budget on 15 December will be a special challenge for Finance Secretary Derek Mackay.
So what are the question marks over Hammond’s likely package on Wednesday? And what are the Scotland-specific problems?
Support for fiscal stimulus has come from all sides. A paper this week from Standard Life Investments argues it is time for fiscal policy to be reset. “A well-targeted stimulus,” it declares, “would help cushion an expected slowdown in growth following the UK’s vote to leave the European Union. It would also provide ammunition to address the deterioration in growth rates seen over recent years, through targeted investment and structural reform.”
Relieving Hammond of the need for an immediate major boost is evidence of recent strength. The economy is growing at a better than expected 2.3 per cent year-on-year and the fourth quarter augurs well, with buoyant retail sales and overall survey evidence from the purchasing managers relating to the manufacturing, services and construction sectors also relatively healthy.
So any spending boost is more likely to be thrown forward to late 2017 and beyond. Latest figures show Public Sector Net Borrowing (PSNB) hit £45.5 billion during the first half of 2016/17, substantially less than the improvement required. And the deficit is growing – heading for £72.4bn in 2016/17 compared to the March budget target of £55.5 bn. Much, then, is likely to be made of the need for “flexibility” on the fiscal targets and any spending uplift.
To help ease the pressure on household budgets, Hammond is likely to recommit to raise the income tax threshold to £12,500 and the 40p higher rate threshold to £50,000. But here the SNP administration has pledged to keep higher rate thresholds unchanged: not quite a tax rise – but effectively one compared with the threshold down south.
On public spending, the chancellor has already earmarked an additional £2bn to tackle the housing shortage, and on major new infrastructure projects, plans are reportedly in preparation to raise billions of pounds through “infrastructure bonds” – matching private investors and pension funds with transport and energy schemes.
But a paper just out from the Centre for Policy Studies warns that over-investment in infrastructure can be damaging. China spends the highest proportion of GDP on infrastructure in the world and is often held up as a model for ambitious infrastructure projects.
But over-investment in infrastructure can even end up having a negative impact on the macro economy. Professor Deepak Lal has noted that 55 per cent of recent projects in China are judged to be destroying economic value.
And research nearer home indicates that nine out of ten large infrastructure projects are over budget. On average, rail projects are 45 per cent over budget. IMF economist Andrew Warner warns that “when you flip the infrastructure switch, the light doesn’t necessarily turn on. The returns are a long way from being automatic.” The CPS paper argues that the UK government should focus on improving the quality of infrastructure development, not simply allocating more public funds.
In Scotland, pressure for an infrastructure spending boost is even more pronounced, with the collapse in the oil price and the havoc wrought on the North Sea sector and its myriad suppliers – though problems are more deep-seated. Scotland’s economy has grown by just 4 per cent since the recession of 2008/2009, compared with 23 per cent for the UK. Our growth rate is now a whole percentage point behind the UK rate. A gap seems to be opening up with the rest of Britain in productivity and wealth and the grim truth facing Scotland’s finance minister is that, year after year, we are getting poorer relative to the UK.
Holyrood ministers have been swift to blame Brexit and the years of austerity imposed by Westminster – notwithstanding figures last week showing government spending per head in Scotland at £10,536 running £1,460 higher than the UK average.
Contributing to Scotland’s lame performance is a dearth of businesses. Indeed, the Scottish Government’s own figures show the number of companies here is now falling while rising rapidly across Britain as a whole. There are about a quarter fewer businesses in Scotland, measured on a per capita basis, than for the whole of the UK. This has to be of concern, for without businesses generating jobs, investment, activity – and tax revenue – growth of any sort is difficult to sustain.
Meanwhile, of mounting concern is the squeeze on household disposable incomes and the cost of living, with little debate in Scotland about cost of living rises coming down the track. For example, workplace pension auto-enrolment has risen sharply, with minimum initial contributions set low, but big statutory increases are in the pipeline for 2018 and 2019. Yet, at present ,wage growth is moderating and inflation, on Bank of England forecasts, is set to hit 2.7 per cent next year. Household incomes are set to be further squeezed by rising council tax – potentially up to £170 million a year from next spring – and all this while wage growth here lags that of the UK overall.
These concerns do not factor in any rises in income tax rates in the period ahead. Says Scottish Retail Consortium director David Lonsdale: “MSPs should be wary about putting up personal taxes further and adding to the pressure on household disposable incomes when consumer confidence remains fragile, inflation is set to rise further, and with statutory increases in employee pension contributions. Disposable incomes are being squeezed and the spending power of households reduced.”
Of the two budget statements ahead, Scotland has truly deep-seated problems to tackle – and none of them easy to resolve.