The UK Budget is seriously missing the point. It will not create any growth and the already bleak forecasts will have to be downgraded again.
The financial industry was one of the main drivers of the economy before the 2007 crisis. It is a highly productive industry that used to generate huge output by a relatively small amount of people. So cutting back on the finance industry means the UK industry can’t grow as quickly as it could before. In fact it barely grows at all.
The government has two options. Either go back to this financial sector model or develop other sectors. The financial sector is very important to an economy, it is more productive than most other sectors and provides funding to enable other sectors to grow too. But relying on it too much makes the economy vulnerable to shocks. Just look at Cyprus.
So the UK needs a new growth model. But the government seems to think that the day-to-day point scoring in the House of Commons is much more important than solving the deep deficiencies of the economy.
The government needs to get serious about investment in capital, both human and fixed, for this to happen.
What it is doing, however, is spending ever more money on the biggest cost to the economy and less on everything else. The NHS. Spending on the NHS should be linked to the GDP growth because in bad times, like now, it sucks up government spending that should be spent elsewhere. Because spending on the NHS is large (30% of all government departmental spending), even a small cut is equivalent to much larger cuts in other departments eg. NHS budget is around £108bln, 1% of that is £1.08bln. To raise the same savings in a department such as International Development with a £9bln budget you need to cut by more than 10%!
Source: OBR, author’s own calculations
It’s not just that the government can save money by cutting NHS spending but it can make it much better and more efficient too.
Keynesians talk about fiscal stimulus but let’s be clear, if a fiscal stimulus is to be spent, spend it on things that will produce an on-going return at the end of it rather than tax credits that give a short-term or one off boost once they’re spent.
The UK needs structural reform and in a time when we can’t produce as much as we used to, that means cutting back on big government and using the savings to invest in areas that will change the UK growth model to produce long-term growth.
The UK doesn’t need a quick fiscal boost to get it back to growth, it needs a large scale restructuring. That means investment in infrastructure (not just large headline projects like Cross Rail), it needs investment in research, science and technology and it needs investment in education. But these investments must come from savings elsewhere and the NHS is the place. Otherwise we will see very little growth. Japan failed to address its structural deficiencies and look what happened there.
If we do this it will make us all better off and the NHS will have secured greatly improved and sustainable funding.