Rebalancing vs cost of living: a false choice

As the parliament has worn on the language of ‘rebalancing’ has faded from the Chancellor’s speeches. The reasons are easy to see. Rapid improvements in GDP last year have focused minds on who is benefiting from growth, not just how to generate it.

The chancellor’s Budget tomorrow looks set to reflect this shift. Potential announcements which have surfaced– raising the personal tax allowance, a recommendation on the Minimum Wage, an offer on childcare – are designed to neutralise the persistent Labour claims that the government lacks an answer to the ‘cost of living crisis’.

But they’re not mutually exclusive; the dichotomy between living standards and rebalancing is a false one that this Budget should collapse. It needs to focus, as a matter of priority, on boosting investment and raising productivity. Economic rebalancing and supporting living standards are not conflicting aims but two sides of the same coin.

The backdrop to tomorrow’s statement differs markedly to 2013. Where last year some questioned the tenability of Osborne’s position, Britain is now expected to grow faster than any other country in the G8. At the same time growth has not yet fed through into rising living standards. Household incomes have taken a well-documented battering during the recession, and at the median are back at the levels last seen in 2001.

Tax cuts can go some way to ease this pressure on household finances, but they do little to reform the underlying weaknesses in the British economic model. Even before the crisis real GDP had become a poor proxy for the financial prosperity of ordinary households as the gains of growth were not reaching the bottom half of the income distribution. Combined with rising inequality between the very top and rest the outwardly successful economy harboured critical structural weaknesses.

No chancellor could be expected to remedy these problems in a single Budget. But fiscal announcements can show what a government hopes to achieve. The Fabian Society recently laid out the measures of success it thinks should supplement GDP.

One of these should be to address the ‘productivity puzzle’ which is at risk of becoming a disease.  Although there are now more people in employment than before the crisis, the output of British workers has stalled, as the graph below shows.

Stagnant productivity matters because it is likely have a downward effect on wages – and the weak growth in pay experienced during the recession (and before) is the root cause of the cost of living crisis. A low wage, low productivity growth model will not put an end to the cost of living crisis and should be avoided at all costs.

One the many causes of weak productivity during the recession has been the slowdown in investment. Business investment particularly has dried up, contributing to lower than expected growth. Surveys suggest business investment could pick up this year and the Budget should do everything it can to support and augment this shift in intentions. The Fabian Society’s Commission on Future Spending Choices outlined a package of measures for spending which strengthens the long-term capacity of the economy.

Rebalancing the economy is vital for our long-term prosperity. The best way to improve living standards for everyone isn’t quick-fix gimmicks and fiddling around with tax thresholds but structural reforms to our lopsided economic model. A Budget that fails to address these problems will be another opportunity missed, another year for the problems to fester under the surface. Without action, we run the risk of a repeat of 2008.